Cryptocurrencies have taken the world by storm. The big names include Bitcoin, Ethereum, Ripple and even Dogecoin, which Business Insider says started as a joke. Currently, cryptocurrencies are still treated as property rather than currency.
Holding cryptocurrency does not require you to pay taxes. However, you will owe taxes if you sell your currency or spend it. If your head is already spinning, don’t worry. Our quick and definitive guide will explain how the IRS treats cryptocurrencies.
Short-term vs Long-term Gains
A short-term gain applies to any transaction completed in less than one year. The tax rate for short-term transactions can be as high as 39%. Additionally, you’ll be responsible for your state’s taxes. These can range anywhere between 3% to 13%.
Long-term gains apply to any asset(s) that have been held for one year plus one day. These are taxed at a lower rate, however, the rules for these are not any less complicated. A person earning more than $200,000 as an individual or $250,000 filing jointly, could owe an extra surtax of 3.8% through the Net Investment Income Tax (NIIT).
Tax Implications of Cryptocurrency
In February 2018, the IRS asked popular crypto exchange network Coinbase to hand over information on its 13,000 customers. They sought taxpayer IDs, names, birthdates, addresses, and transaction records for certain higher-transacting customers from 2013 to 2015. Coinbase had to comply due to a federal court order, explained here by CBS Money Watch.
As with all investments, investing in cryptocurrencies, also known as altcoins, presents risks and potential rewards. Unlike traditional investments such as stocks, cryptocurrencies are treated as property, not cash. Selling your altcoins is taxed the same as if you were to sell your home or other physical property.
To ensure that you’re complying with IRS tax standards you’ll need to gather these four pieces of information;
- Date you purchased the crypto
- How much you paid for it
- Date you sold it
- What you received for it
It’s important that you track the basis, which is the original value of any given asset for tax purposes. The basis is typically the purchase price but can be adjusted for things like splits, dividends, and returns of capital distributions. This can be very confusing for the average investor, so enlist the help of a professional if you need it.
To abide by the IRS regulations and avoid an audit, keep an accurate log of all your transactions throughout the year. Keeping a detailed record will help you and your CPA come tax time.
Just like any other time you earn income, put aside some money each time you make a taxable trade to compensate for the tax that will eventually be associated with that transaction. The recommended amount is anywhere between 15% to 20% of the income gained.
Call DCA CPAs
If you’re still confused or uncertain about taxes and how they apply to your gains regarding altcoins, contact the certified public accountants at DCA. We offer a broad range of accounting, tax, and valuation services for both businesses and personal individuals.