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How is Cryptocurrency taxed?

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Are Cryptocurrencies taxed?

Just as the IRS regulates traditional currencies, they have their hands out for virtual currencies, too. The idea of Bitcoin was proposed by an anonymous software developer in 2008, and in 2014 the IRS proposed their taxation solution. Their proposal addressed Bitcoin as property, despite Bitcoin and other virtual currencies being intangible methods of payment that cannot be seen nor touched. But according to Forbes' article "What You Should Know About Taxation Of Cryptocurrencies
, since the IRS classify cryptocurrency as property, this means that general tax principles apply, and any financial gains or losses during purchases, sales, or exchanges must be reported on tax returns.

Tracking Cryptocurrency Gains and Losses

Tracking cryptocurrrency gains and losses can be tedious because sometimes this means tracking every single event related to the cryptocurrency you hold. If, for example, you purchase a Bitcoin for $1200, and then use that Bitcoin to purchase $2000 worth of merchandise, you have to recognize that $800 gain. That right there are three cryptocurrency events, with the most notable taxable event being the $800 gain. The IRS' ruling that cryptocurrency is property presents a challenge for the average taxpayer in that taxable events can happen every single time a transaction occurs. This kind of continuous tracking is not only tedious, but can lead to plenty of opportunity for mistakes.

It is equally important to keep track of the purchase of the cryptocurrency itself. Whether you are purchasing Bitcoin, Litecoin, Ethereum Coins, or another type of cryptocurrency altogether, be sure to keep track of what kind of cryptocurrency, how much you spent for it, and when you purchased it. Likewise, use the FIFO method -- First In, First Out -- as it is entirely possible for cryptocurrency to appreciate or depreciate.

Gains and losses on cryptocurrency transactions depends on whether or not the cryptocurrency happens to be a capital asset. Sales resulting in gain can qualify as capital asset. Net long-term capital gains can include gain on crypto transactions, and are eligible for desirable tax rates, which are the highly-preferred 15% or even 20%. Cryptocurrency gain is considered to be unearned income for the purpose of the unearned income Medicare contributions tax that was introduced in conjunction with the Affordable Care Act. Consequently, those taxpayers with adjusted gross incomes in the range of $200,000+ will find that they will be facing a 3.8% tax hike on any cryptocurrency gain.

What If My Job Uses Cryptocurrency?

Some businesses have begun to accept Bitcoin and other cryptocurrencies as payment methods, and some businesses are even trading and even making their own purchases using cryptocurrencies. Mining of cryptocurrencies as a trade is acceptable to the IRS so long as the reports on tax returns are classified as net earnings for self-employment taxes. Cryptocurrency mining is a resource-heavy process that is executed in order to verify transaction records; this process is often launched in order to verify transactions. During this process, which is called a "Blockchain", digital coins are received in return. Cryptocurrency mining is labeled as a business on tax returns, whereas investments into the cryptocurrency business is considered to be an investment. This distinction is made due to investment gains and losses being subject to capital gains and capital loss regimes, while business income is held to an entirely different taxation standard.

Things to Consider

The IRS has deemed cryptocurrency to be taxable property, to be sure to track your handling of any cryptocurrency you own. Any investment into your cryptocurrency will hopefully result in gains and not losses, but either way, be sure to report all results accurately.
According to TurboTax, cryptocurrency is subject to the same withholding percentage as standard wages. When calculating withholding on your W-2s, take this into account. Total wages must be reported in U.S. dollars, with conversions being made on the date virtual currency payments were received. Crypto tax software can assist with these calculations and conversions.
Certain events are not taxable events. These do not have to be reported to the IRS, nor do you have to pay taxes on these amounts. According to CryptoTrader, these events include giving cryptocurrency as a gift, transferring cryptocurrency, and purchasing cryptocurrency with U.S. dollars.

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