Cryptocurrency is defined as a decentralized form of currency where no government or organization owns it. But the concept whatever you earn is yours and yours alone right?
The truth is the US government has been working on ways to regulate cryptocurrency so that they can also get a slice of this digital pie. With Bitcoin and other cryptocurrencies complex in both their design and definition, it is hard to place the currency in a taxing bracket. So how did the government tackle this problem?
They made cryptocurrencies a property and not a currency for tax purposes
Bitcoin is described as a digital asset or property. An asset is acquired by purchasing rights to something of value. This asset is then held by the owner and can be sold to another party on the agreement. This is basically the same process that a Bitcoin goes through, only virtually.
By establishing that cryptocurrencies are a form of property then the same taxes applied to property is referred to Bitcoin.
Record keeping has always been an essential part of taxation, especially for business. It shows the inflow and outflow of money and hence is the construct that defines how much you will be taxed. Good records will help you track the number of Bitcoins you bought, how long you held them for and at what rate you sold them for. This is precisely what happens when the IRS taxes your house or land.
Fair market price
The fair market price is defined as the market value agrees with the two parties for an asset. With the volatility rate of cryptocurrencies, it is essential to mark when the sale is made and at what value the cryptocurrency was at the moment.
Business using Bitcoin taxed
A company that uses cryptocurrencies have perhaps the most straightforward way of crypto-currency taxation in the current system. They use Bitcoin as a currency, and hence it will be counted as such by the IRS. In case someone buys something from your store using Bitcoin, the IRS will convert it into US dollars and tax it accordingly. But after it shifts hands it becomes an asset. When it turns into an asset, you are imposed on the gain the property makes. This has to lead to many experts thinking that this may lead to double taxation.
Important things to remember about taxation and Cryptocurrencies
- The value of the cryptocurrency is measured in the form of the US dollar once it is purchased and till it is sold
- You are also taxed according to how long you hold the cryptocurrency, i.e., Long-term and short-term asset
- Cryptocurrencies are reported on Schedule D & Form 8949 or Form 4797 just like all other assets
- The income released will be measured by the gains and profits from the acquired cryptocurrency