Taxes are complicated anyway; tax on crypto income is considered even more critical. In the last few years, cryptocurrency has been the talk of the world. Bitcoin, Ethereum or any other cryptocurrency received much attention. Controversies are also there around these online untraceable blockchain monetary systems.
It is necessary to report to the IRS if you have profited from buying or selling crypto in recent years. For normal people understanding this whole process can be challenging. This blog will discuss some of the basics and must know factors of cryptocurrency.
- What is Crypto Currency?
Let me explain to those who don’t know anything about cryptocurrency. It is a digital currency not controlled by any governing body or county, but a complex blockchain system is behind it. Being executed by a decentralized system is its advantage and a matter of concern for existing governing bodies.
In simple words, cryptocurrency is nothing but an encrypted data string that denotes a currency unit. As it is a digital currency, people from different parts of the world find it easy to transact. Its complete security and anonymous nature is gaining huge popularity in the modern age.
- Stand of IRS on Crypto
Since 2014, IRS has made clear its stand on cryptocurrency. According to IRS, crypto is not a currency. It is a property. This means the purchase and selling of crypto are considered property transactions.
When a person buys and sells crypto, he makes either a profit or a loss. This profit is taxable. If not properly mentioned, IRS can give notices or audit your account according to the law. Contact tax experts (whom include tax attorney lawyer) in that case.
- The Tax Calculation for Crypto Currency
All people must know the basic tax calculation methods for cryptocurrency. When we buy any crypto coin, the cost basis is the amount we spend to purchase the crypto plus the service fee. Usually, people treat these currencies like stocks.
Over a time when we feel about selling that crypto, we make some money. The gain is taxable by law. To know more, read through IRS Publication 551, the basis of assets. One should contact an experienced Crypto accounting firm for help.
- Difference Between Crypto Transaction Income and Ordinary Income
According to law, when any crypto is mined, earned, or stacked from airdrops, giveaways or initial offerings are considered ordinary income. Whereas when someone holds and sells later, that transaction income is considered capital, taxable accordingly.
- Additional Reporting and Obligations
Few cryptocurrencies can satisfy the SEC’s security definition. For them, we need to register differently. Companies that own online platforms for selling and buying
Cryptocurrencies need to register themselves as an exchange. Individuals managing those platforms must be registered as brokers or investment advisers. Cryptocurrency is a new thing to the world. There is an ardent believer in more democratic and universal coins. People who question authenticity and longevity are also there. It is necessary to take precautions and get advice from the experts.