Cryptos and Taxes 2018
With tax season looming on the horizon, a lot of people are worried about what they need to do with regard to their cryptocurrency investments. So, here are a few tips on how to handle your taxes in relation to your crypto-investments for 2018
Crypto to be treated as Property
For tax purposes, cryptos will be treated as property. Therefore, general tax laws related to property transactions will apply also for transactions that have used cryptocurrency.
Therefore, if a taxpayer receives cryptocurrency as payment for goods and services, he will need to include the fair market value of the cryptocurrency when computing gross income. And the value must be in US dollars on the date that the cryptocurrency was received.
The fair market value of a cryptocurrency is decided by converting it into US dollars (or another fiat currency that can then be converted into USD) at the exchange rate. The cryptocurrency, however, must be listed on an exchange and that exchange rate must be established by market forces.
Gains and Losses to be reported to IRS
Depending on the adjusted basis of the cryptocurrency vis-à-vis the fair market price of the property received, the taxpayer can incur either taxable gain or loss.
The type of gain or loss the taxpayer incurs will depend on whether the cryptocurrency is classified as a capital asset or not. If it is, then it will be taxed as a capital gain or loss on the sale. If not, then it will be taxed as an ordinary loss or gain.
Tax consequences for mining cryptocurrencies
Mining of cryptocurrencies are taxed under gross income. Therefore, when a cryptocurrency is mined, the fair market value of that crypto – on the date it was mined – will be applied. Additionally, if the mining operation is a business (and the taxpayer is not an employee), then a self-employment tax will be applicable.
Usually, self-employment income includes all gross income for services rendered. Therefore, the fair market value of a cryptocurrency on the date it was received will be taken as self-employment income and taxed as such. Again, any payment made to any independent contractor that is more than $600 has to be reported to the IRS on Form 1099-MISC.
Remember, just like any other payment that is made in property, a cryptocurrency payment also needs to be reported.
These are just a few tips related to cryptocurrencies and taxes. If you are dealing in/investing in cryptocurrencies, it is best to speak to a financial expert to ensure that you don’t make mistakes in your tax declarations this year.