Tax Day is July 15 this year due to the coronavirus outbreak. Do you or your clients own Bitcoin or other Cryptocurrencies? Make sure you are documenting properly for the IRS.
Taxation is an aspect of traditional financial institutions which most individuals have yet to master. Declaring income, filling out the details of the tax forms, and calculating just how much in returns should be given to the government is a herculean task for some people. For most, it is easier to consult with an accountant or tax analyst to have the amount due calculated. With recent developments in the supposedly abstract world of cryptocurrency, and the entire crypto space, certain regulations are being put in place to introduce the taxing system for crypto transactions as well.
As one can imagine, this is bad news for crypto traders, investors, and miners who have not gotten a hold of their actual tax returns. However, like most things in the development of societies, this request by the government and governing bodies has been met by a technological advancement in the area of financial technology. Management of taxes on crypto transactions has been rendered very easy with the introduction of software that helps in the analysis of transactions and all other aspects pertaining to crypto taxation.
The Internal Revenue Service (IRS) posits for cryptocurrency to be regarded as property, like gold not currency, which means that capital gains will apply on all transactions where there is a gain for the crypto owner. Returns on investments such as property, get taxed based on the capital gain which has been incurred on sales or shares dispersion, clarifying that any capital gain on cryptocurrency will definitely be taxed. The actions of the IRS drew more awareness to crypto trading, in tandem with the publishing of a 40+ FAQ on cryptocurrency, in October 2019.
The bulleted list below details the expected bracket for tax reporting, and if you fall into any of these categories, your tax payment will need to be evaluated. To figure out how much tax you owe and to avoid getting fined for tax default, you can use software readily available which has been designed to help you calculate your taxes.
Here are four conditions under which tax payment are applicable:
If you trade cryptocurrency to fiat currency (standard cash) like the US dollar
If you trade cryptocurrency to cryptocurrency
If you use cryptocurrency to access goods and services
If you earn cryptocurrency as an income
In all four of these conditions, the cryptocurrency is calculated with the fair market value in USD. If you belong to any, or all, of these categories, then a tax needs to be calculated and paid.
In the United States, the economic institution through the IRS issued its first public action in light of crypto trading in 2014. This was done through warning and action letters, which simply drove awareness to cryptocurrency. Despite this initial guidance in 2014, it was not until 2017 when the government really took interest and began to mobilize public action which spiked compliance.
In October 2019, the IRS announced that new regulations to further investigate and promote tax returns on crypto transactions would be enacted. Due to the growth of the crypto space with an influx of new users, expansion of crypto transactions through institutional investment and enterprising, as well as advancement of blockchain in corporate organizations, there is a larger ecosystem upon which cryptocurrency functions, and this transcends into mainstream activities. There are companies paying salaries with cryptocurrencies and stores accepting crypto payment, which forces the demand for regulations within the financial institution, which ultimately includes payment of tax on crypto transactions.
At the beginning of 2020, the IRS issued an official declaration which mandates crypto owners to file their tax returns using the Schedule ‘D’ (Form 1040) attachment in addition to trading information which must have been provided on the recently reviewed 8949 tax form. The IRS expects at least 150 million filers to report, file and pay all tax owed on cryptocurrency and trading, by July 15, 2020. While the process of monitoring and reviewing the tax activity of crypto owners has not been determined with a definite breakdown, it is important to accord due reverence to this issuance.
The world of finance has experienced an evolution of innovation within the last decade and, as expected, this has resulted in several institutional changes. The age of crypto trading and cryptocurrencies seemed a little too abstract in the beginning, but when they started spiking higher in 2014, even the government acknowledged this next step in FinTech industrialization. As an aspect of finance and economic activities, it became a question of when, not if, crypto traders and those who transact in cryptocurrencies would have to pay tax.
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