How Is Cryptocurrency Taxed?

June 10, 2018

Unless you are a seasoned investor like Leonardo González Dellán then you might have a lot of questions when it comes to cryptocurrency and its tax treatment. Despite the increase in the number of digital currencies in the market and the millions of investors all over the world, tax rules are not yet clear when it comes to the virtual currency sector.

The Internal Revenue Service provides guidance in terms of cryptocurrency taxes but it was back in 2014. During that time, the price of Bitcoin is only $585 and its market value only totals to $14,020,100 but it has now reached $4,631,500,000 with its price at $7,500 per coin. These numbers only cover bitcoin and there have been other digital currencies since such as Ethereum and Ripple.

According to the 2014 guidance, cryptocurrencies are considered to be capital asset when it comes to taxation. Capital asset is referred to those that can be changed into cash. Basically, the guiding principle of capital gains is that everything with possibility of gaining or losing. Filing taxes are not simple though and there is a need for additional guidance to answer important queries. The guidance is also needed for unconventional situations including splits and forks.

The guidance is now important more than ever because the IRS is requiring users to comply after accusations were made regarding taxpayers using virtual currencies in order to avoid reporting their taxes. To relay their serious intention with the matter, the IRS mandated Coinbase which handles transactions among cryptocurrencies to provide them with their customer data.

The matter was submitted to the court which led to Coinbase submitting some specific data concerning a number of customers. The IRS said that of all taxpayers only between 800 to 900 submitted reports that they gained from trading bitcoin when in fact over 14,000 users are transacting through Coinbase. The numbers led the IRS to believe that many of the users are not submitting the proper bitcoin gains.

Tax professionals and investors such as Leonardo González Dellán agree that additional guidance should be released to help the taxpayers report correctly.