Today cryptocurrencies have become a worldwide marvel known to most people. However, the taxation of cryptocurrencies is still not understood by many people. Cryptocurrencies may be utilized to pay for goods or services or they can be saved as property. Virtual currency is a digital symbol of value that works as a tool of exchange, a unit of account, and/or a store of value.
In some countries, it works like “real” currency — i.e., the coin and fiat currency of the United States or of any other country that is characterized as legal tender. Cryptocurrency is frequently utilized and trusted as a mechanism of exchange in the country of issuance but it does not have legal tender status in any jurisdiction. Here’s a summary of cryptocurrency taxation in the US that has issued formal tax regulations.
IRS and Cryptocurrency Taxation
The Internal Revenue Service of the US has already published a guidance on the tax processing of transactions utilizing digital currencies, such as Bitcoins or other virtual currencies. The trading or other exchange of virtual currencies, or their utilization to pay for goods or services, or holding virtual currencies is liable for taxation in the US.
- Federal Tax: In USA, for federal tax purposes the virtual currency is treated as capital. Comprehensive tax laws are relevant to equity transactions and they are also applicable to transactions of cryptocurrency.
- Crypto to Fiat: Trading cryptocurrency to a fiat currency is a taxable transaction. Not only this, but trading crypto to crypto is also a taxable transaction.
- Virtual currency as payment: People who receive cryptocurrency as payment for goods or services come under taxable income.
- Mining: If peoples’ “mining” of cryptocurrency establishes a business or trade, and the “mining” exercise is not initiated by them as employees and the net earnings from self-employment are subject to the self-employment tax.
- Remuneration For Services: The medium in which compensation for services is paid is irrelevant to the decision of whether the remuneration forms fees for employment tax plans. Consequently, the fair market value of virtual currency paid as wages is subject to federal income tax.
- ICO: Initial coin offerings do not come under the IRS’s tax-free strategy for establishing funds. Thus, they generate regular returns to people and associated trades.
- Airdrops: Airdrops are recognized as regular income on the day of the airdrop. That value displays the source of the coin. When it’s sold, exchanged, etc., there will be a capital gain. Hence, they come under taxation.
For U.S. tax plans, businesses using cryptocurrency must be recorded in U.S. dollars. People are expected to ascertain the common market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is registered on an exchange and the exchange rate is set by market stocks and demand then the fair market value of the virtual currency is defined by transforming the virtual currency into U.S. dollars or into another real currency which can be converted into U.S. dollars at the exchange rate, in a rational way that is consistently implemented.
The part of the profit or loss usually depends on whether the digital currency is an asset in the hands of the people. People commonly recognize profit or loss on the transaction or exchange of virtual currency that is a capital asset. For example, stocks, bonds, and other investment holding are usually capital assets.
The Treasury Department and the IRS of US have also identified that there may be other issues about the tax outcomes of virtual currency. Therefore, the Treasury Department and the IRS have requested remarks from the public about other types of characters of virtual currency activities that should be directed in future guidance.
In short, it looks like the future will be a milestone when it comes to the IRS and taxing cryptocurrency gains in the USA. The IRS interprets cryptocurrency as property and as per IRS guidelines, there are capital gain indications.
Disclaimer: This information should not be interpreted as an endorsement of any cryptocurrency. It is not a recommendation to trade. The crypto market is full of surprises and overhyped assets. Do your research before buying anything. Do not invest more than you can afford to lose.