A cryptocurrency is a form of virtual or digital forex that makes use of cryptography to enhance security. It isn’t issued or regulated through any central body, making it theoretically immune from governmental interference or manipulation. Instead, cryptocurrency is decentralized, which means it operates on a peer-to-peer network that isn’t controlled by any single entity.

The main issue is that the IRS does not consider crypto to be either a tangible asset or property. This means that the current regulations do not specifically address the taxation of crypto at the federal level. This has caused much confusion among crypto investors, who are uncertain about how to report their income and how much they should be paying in taxes.

Taxes and NFTs

The confusion has been further compounded by the advent of non-fungible tokens (NFTs). NFTs are digital assets that are stored on the blockchain and have unique characteristics that distinguish them from other crypto assets. They are not considered a currency or a security and are not subject to the same regulatory framework as other crypto assets. This means that investors are unsure how to report their NFT profits or what taxes they should be paying.

Crypto is now undertaxed

The lack of clarity around taxes has led to a situation where crypto is significantly undertaxed in the US. This is a problem for the US government, as it means that the government is missing out on tax revenues from crypto investors. Also, it makes it difficult for businesses to know how to price services or products that involve cryptocurrency due to the lack of know-how about the tax liability they might face.

To address this issue, the IRS should create a clear and consistent framework for taxing crypto. This would ensure that crypto investors pay their fair share of taxes and help generate much-needed government revenues.

In the meantime, crypto investors should work with a qualified tax professional to ensure they correctly report their crypto income and pay their taxes. They should also keep up to date with any developments in the regulatory environment, so they can be sure they comply with all applicable laws.

Photo by DrawKit Illustrations on Unsplash

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Now however, the IRS is much more confident that people have not been reporting their cryptocurrency gains. As a result, they have made strategic moves to have it reported. One such effort was in 2020, when they moved questions of crypto gains from Schedule 1 of taxes to the 1040 form itself. 

The IRS is so serious about the lack of reporting of crypto that it is now sending out thousands of letters to individuals whose names were reported as buyers of cryptocurrency through various sources.

All this said, you do not have to report buying cryptocurrency. For instance, if you bought a couple of bitcoins (even as high as say, $30,000 in 2021), so long as you haven’t sold it, it’s not taxable yet.

However, if you bought bitcoin at $30,000 and sold at a profit (or a loss,) then you must report it on Schedule D of your taxes as capital gains.

But note, that capital gains taxes come in two forms, short-term and long-term capital gains.

Capital Gains and Crypto 

Let’s say you bought a cryptocurrency in March of 2021, and the price dramatically went up on that cryptocurrency in June, and you sold out at a substantial profit. Since you did not keep the cryptocurrency for over a year, then you would pay short-term capital gains profits. 

If however, you bought the cryptocurrency in 2015 and kept it until June of 2021, then you would pay long-term capital gains, which are generally less than short-term capital gains.

In many cases, when you buy or sell a cryptocurrency, then the exchange where you bought it will send you a 1099B, Proceeds from Broker and Barter Exchange.

But what about when you spend cryptocurrency? Let’s say that you bought a cryptocurrency for $300 and then it shot up to $800 over 6 months. But instead of selling out the cryptocurrency on an exchange, you transfer ownership of cryptocurrency to a company in exchange for goods. 

You must report that $500 profit as capital gains as well, even if you exchange your
cryptocurrency for physical goods. 

Frequently Asked Questions

Do you pay taxes on crypto?

Yes, currently crypto is considered “property” which means they’re as taxable as any real property you own. It’s also subject to capital gains taxes depending on when you sell.

How can I avoid getting taxed on crypto?

Not selling would be the only real way to avoid taxes on crypto. The taxes come once you sell it and if you realize a gain. To avoid taxes, don’t sell it.

Meanwhile, this opens the question, can you report a loss on crypto and the answer is, yes. Again, it’s not ideal (as any loss is), but it can offset your capital gains and up to $3,000 of your personal income. If it exceeds that amount, then it can be applied to future tax years.

Do I need to report crypto I didn’t sell?

No, because it means you have no gains or losses to report. However, even if all you did was exchange crypto, you do need to report it to the IRS.

Image by Reto Scheiwiller

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There are several reasons to believe that cryptocurrencies and, more specifically, bitcoin will enter the global asset market soon. Since bitcoin was initiated in 2009 by an individual (or anonymous group) known as Satoshi Nakamoto, it has received much criticism and accrued many benefits. It keeps increasing in value, and many people are currently trading in bitcoin. Here are facts about cryptocurrencies you need to know.

What is Cryptocurrency?

It is an internet-based medium that allows for the exchange of financial transactions using cryptographical functions. They mainly use blockchain technologies to help in acquiring transparency, security, decentralization, and immunity. Any central authority does not control it; hence they are immune to control by government or individuals.

These currencies are seamlessly sent from one person to another by the use of private and public keys. The transfers are quick and use very minimal processing fees. Many people use cryptocurrencies globally, and it has become a prevalent form of online marketing. The birth of cryptocurrencies was, however, unintended. The unknown inventor Nakamoto says they were looking to create a digital cash system that was like a peer-to-peer network to share files.

What is Bitcoin?

So far, Bitcoin is the most popular cryptocurrency in the market. It is a virtual currency that you can use to purchase goods, just like the typical cash you use. Simply put, it is an online version of paper money. You can use it for services online or sell them for profit. You may be wondering, if it’s completely digital, why is it so valuable? It’s because Bitcoin has secret codes that make each unique and valuable.

Bitcoin is a soft-copy file stored within a digital wallet. You can send the bitcoins to your wallet or transfer them to other people. When you make any transaction, the activity is recorded on a blockchain. You can still trace the transaction history that was completed on the blockchain.

How Can Cryptocurrency Enter Market as a Global Asset?

Cryptocurrencies have become extremely popular for people operating online. It is volatile, and a bitcoin can sell for high or low depending on sale rates. Since they are straightforward and digital, many customers prefer bitcoins for trading in the global market. Governments have realized the popularity of bitcoins and may soon use them mainly as a global asset. Most domestic currencies are mismanaged. Thus, there is a need to have a digital currency that cannot be compromised.

Some governments have strict capital controls that affect the flow of money and thus charging high taxes. It would be best to use cryptocurrencies as a global asset to address illegal taxes and capital controls. The many benefits of using bitcoins in the worldwide market are pushing people to start using it as a global asset. It provides frictionless transactions and inflation control.

In closing, cryptocurrencies are popular, easy, and secure. It would be best to have it as a global asset since there will be no central control to eliminate illegal taxes. People can trade freely and easily through international borders.

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The genesis for this post was pretty simple. It began with a two-fold question: Do you pay tax on Bitcoin, and if so how? We can answer the first part right away: No, you do not, at least not yet. This leaves the second part up for discussion.

We don’t have an opinion on this issue so you shouldn’t view this post as a tax professional commenting on the future taxability of Bitcoin. Instead, we’ve put together a few media viewpoints for educational purposes. Remember, only death and taxes are certain—consequently, everything else is relative.

Actually, most of the questions regarding Bitcoin have to do with its longevity and security. In February, about 70% of worldwide Bitcoin transactions on the Mt. Gox exchange site were compromised by hackers and what was the equivalent of about $450 million was stolen. Back in January, in an article entitled “Taxing Bitcoin: IRS Review has Big Implications for Investors in Virtual Currency,” Forbes magazine described Bitcoin as a “sandbox for speculators” and a “marketing fad.” In light of this, you can see where questions about Bitcoin tax are perhaps premature. Bitcoin is not at a viable stage in its development to need to be taxed.

Regardless, there is a lot of interest in ways to turn a profit with Bitcoin,which we suppose means Forbes is absolutely correct in their “sandbox for speculators” assumption. A few preliminary ideas have been brought out including the Winklevoss’s idea of creating a fund that would trade Bitcoin. That kind of emphasis from investors certainly has the IRS and tax professionals considering the possibility of taxation as well as strategies to do so.

From the same Forbes article: “If Bitcoin is a capital asset … long-term gains and losses would be subject to preferential capital gains rates (23.8 percent for high-income taxpayers). However, losses of more than $3,000 could only be used to offset other gains and not ordinary income. Separate rules may apply to professional traders.”

As it stands, there’s our answer. Presently, Bitcoin when it will be taxed will be taxed as a capital asset. That would stand at least until Bitcoin became more viable in the eyes of not just the finance community, but first and foremost found use as real currency. That could happen, but who knows when?

There are Bitcoin ATMs, that work as a sort of Bitcoin depository, so maybe sooner rather than later?

Bitcoin, as a product of the Internet, is new and exciting and unregulated. There is a lot more to be said about it, and it seems like every week there is a new development. If you find Bitcoin an interesting topic, post about it in the comments. We want to hear what you think.

Give us a call at 425-483-6600, and we’ll do your taxes!

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