Cryptocurrency is taking the financial world by storm. The purpose of cryptocurrency is to create a decentralized monetary system. Unfortunately, many people think this means that they don't have to pay taxes on their cryptocurrency.
The IRS requires taxation of cryptocurrency in certain situations. An understanding of these situations will help you avoid any tax problems with the IRS.
Trading One Cryptocurrency for Another
As more types of cryptocurrency are introduced, consumers are choosing to use their existing cryptocurrency to purchase new varieties. According to the IRS, this type of trading is classified as a disposal of assets.
You will be required to pay taxes on the appreciated value of your original cryptocurrency.
For example, if you have $100 in cryptocurrency that appreciates in value to $200 that you use to purchase a new type of cryptocurrency, you will be required to pay taxes on the $100 of appreciated value.
Buying Goods or Services
A lot of businesses now accept cryptocurrency as a form of payment. If you use cryptocurrency to pay for goods and services, the IRS views this as a taxable event. These taxes are paid in the form of capital gains.
The IRS will look at the original value of the cryptocurrency you have purchased when trying to calculate your capital gains.
Any appreciated value that is used as a form of payment will be subject to traditional capital gains taxation.
Cryptocurrency Income
It is possible to generate cryptocurrency income.
Cryptocurrency is mined through a series of verified additions to the original blockchain. Anyone who engages in this mining process will generate an income by accumulating new cryptocurrency.
The IRS views cryptocurrency income as being identical to cash income. You will be required to pay personal income taxes on the total value of any cryptocurrency that you acquire through mining.
Cryptocurrency Gifts
It is possible for one person to give another person cryptocurrency as a gift. The tax laws regarding gifted cryptocurrency can be a bit tricky.
If the value of the gift doesn't exceed the current maximum gift allowance set forth by the IRS, you are not required to pay taxes on the cryptocurrency.
If the value of the cryptocurrency that you receive as a gift is greater than the maximum gift allowance, you could be required to pay a gift tax on the amount that exceeds the allowance.
Work closely with your tax planning accountant to ensure you report you pay the proper cryptocurrency tax this filing season.
Share1 February 2023
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