Everywhere you turn, people are talking about the ups and downs of various stocks, mutual funds, and cryptocurrencies. We all have a firm grasp of what stocks and mutual funds are, but some people may have a harder time explaining or even understanding exactly what it is when you mention cryptocurrency.
It is something that has been around for a few years but is only now beginning to get more popular as it continues to grow exponentially. But what exactly is a cryptocurrency, and if it is some type of “currency,” then how is it taxed? Because you know uncle Sam will want his cut out of your proceeds, so one must know how to properly account for your income or losses.
So exactly, what is Bitcoin? To give a little backstory, Bitcoin was and is the first decentralized digital currency and is the most widely used type of virtual currency. This simply means that these ‘coins’ or money are something that can be sent through the internet. Bitcoin first arrived on the financial scene back in 2009.
The growth of Bitcoin has exploded since its inception and now has a market capitalization or a value of $170 million, based on reports back in May 2020. Needless to say, Bitcoin today is very popular, and there are a few advantages to using it over traditional money, such as being able to send and receive from person to person. There is no intermediary such as a clearinghouse or a bank. Another advantage to using Bitcoin is that the fees are much lower than traditional money transfer mechanisms.
You can use them in every country, and they cannot be frozen, and there are no limits. There really are very few negatives when it comes to using Bitcoin in the marketplace. Bitcoin has created an awesome video explaining exactly how it works. The money is kept in a digital wallet on the internet, so no, you cannot lose it. It is quite an efficient and easy process to utilize for even the beginner of users.
Although Bitcoin is and was the first virtual currency to enter the market, there have since been numerous other types of virtual currencies to emerge. There are currently over two thousand different types of virtual currencies. The most common types of virtual currencies include Bitcoin Cash (BCH), Bitcoin SV (BSV), Litecoin (LTC), Ethereum (ETH), Ripple (XRP), and Libra. Many of these can be found on the stock exchange.
You can get Bitcoin from several different channels. You can buy it through a central exchange such as the stock market. You can also buy it in a similar exchange through a peer-to-peer platform. Even more recently, you can now purchase Bitcoin through ATM’s which can be found practically anywhere. Not surprisingly, you can even receive it as a form of payment from an employer or through work as an independent contractor.
Spending virtual currency is becoming even more popular and very easy to do. It can be used to purchase goods and accepted at certain businesses as well as to pay contractors. Besides donating to charities, it can be used to settle finances between third parties or unrelated merchants. Lastly, and most importantly, it can be used to invest in other virtual currencies and thus be put back into the exchange to be bought and sold again.
That is a very important and interesting question. As we all know, any money we make or receive usually is taxed, as is the American way of life. But when it comes to this newest type of currency, virtual currency, to be exact, how does the IRS see this form of capital. Well, it actually depends on how you use the virtual currency.
If you received virtual currency for payment, then reporting it is subject to your typical federal employment withholding tax such as FICA and FUTA and should be reported on the W2 form. Suppose you are a business owner and choose to pay your employees with virtual currency. In that case, you will be subject to information reporting requirements, and you may be required to file quarterly or annual tax returns for doing so.
Most importantly, if you need to report any gains or losses, there are certain considerations you should take into account, such as the method for identifying the type of units sold, the fair market value and basis, and the holding period for those particular virtual currencies.
Because the IRS treats cryptocurrency as property, you must report that information on your tax returns, and failure to do so can result in a future headache. A few years back, the IRS sent out letters to people requiring them to report their gains and losses from cryptocurrencies. Just like with the stock market, if there are any capital gains or losses, this must be reported. If there are any gains or a profit is made, you will likely have to pay a capital gain tax. Also, depending on when the profit or sale is made and if it before a year’s time or after, it will impact how that transaction should be reported.
Yes, reporting cryptocurrency is fairly new, and when asked on any tax forms if you bought, sold, or traded, you should always answer truthfully. It is just not worth the hassle to not do so. All the IRS wants to know is if you had a taxable event. Not being forthright in your cryptocurrency can bring on more problems than you really want.
In the end, why should you have to sweat over whether you properly reported your Bitcoin or other virtual currency? The answer to that question is that you don’t have to because you have Accolade Accounting to do it for you. We have the expertise and experience to help guide you through accurately reporting your virtual currency. You need not worry about the IRS sending correspondence your way inquiring about your gains and losses in the virtual currency world.
Whether you donate the currency, pay someone, gift it or even get it in a divorce, you can count on Accolade Accounting to have the knowledge about virtual currency and how it will impact your financial tax record. For more information, or if you have questions, head on over to our website today to schedule a consult to see how we can help you make sense of your virtual currency for taxes.
