One of the things which causes undue consternation for many holders of Bitcoin and cryptocurrency is its taxable status. While some naysayers still consider the whole industry a tax avoidance scheme, most users just want to make sure they comply with the rules.
Fortunately, many jurisdictions, including the US, have fairly clearly defined regulation, in this area at least. So how can you ensure that your cryptocurrency ownership is all above board with the IRS? According to a Certified Public Accountant in Ohio, it is all about the record-keeping.
The Rules Of Bitcoin and Crypto Investment
According to the IRS, Bitcoin and cryptocurrency is not legal tender, but more akin to a property such as a stock, or other investment. Therefore, buying and selling it follows the same rules.
Your ‘basis’ in the cryptocurrency is the purchase price plus permitted transaction fees. When the cryptocurrency is then sold, there will be a taxable capital gain (or redeemable loss), based on the difference between the basis and the sale price.
Accepting And Spending
Spending your Bitcoin or altcoins is not much more complicated, as any amount used in a transaction is considered as having been sold. As such, the difference between the amount spent and the price which those tokens were bought for (plus fees), becomes the amount which must be declared for capital gains.
Those who are paid in cryptocurrency also have a fairly straightforward rule to follow. A Bitcoin (or altcoin) payment is essentially treated as though you were paid in cash and immediately used it to buy tokens. Therefore, the cash payment is subject to income tax as per usual.
The amount of this payment then forms the basis for your crypto holdings, and is used to calculate capital gains or losses on its disposal.
Record, Record, Record
The key piece of advice for those who wish to ensure that they comply with these rules is the diligent recording of any transactions that you are a party to.
Record the dates of any transaction, whether incoming or outgoing, along with the number of units involved in the transaction, and the unit price in US dollars on the transaction date.
This will allow you or your accountant to ensure that the correct information is entered onto tax returns.
A US court recently ruled that the IRS could demand individual user information from cryptocurrency exchange, Bitstamp.
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