As we previously discussed, cryptocurrency experts and investors alike believe that one day tokens will be a widely accepted form of recognized currency. In this new era, you would be able to make purchases and earn your income in tokens like Bitcoin. I know what you’re thinking; a single Bitcoin is worth over $39,000 (as of the drafting of this article), how can you possibly get paid in it. That’s where the advantage that cryptocurrency has over traditional cash comes in; it’s completely digital and based upon complex mathematical formulas that are constantly being solved by the computers in the blockchain, so you can break down a token into fractions that go for several decimals. So, you can spend 0.0003 Bitcoin for that burrito from Chipotle. Having this precision and flexibility can allow for more accurate transactions and potentially more savings on high volume production costs.
How to Spend Cryptocurrency as Cash
Many of the retailers that accept cryptocurrencies use third-party processors, such as Bitpay and Cryptopay. It’s wise to understand how the payment system works and what fees may be involved before you jump in. Shopify, a processing system used by many small, local businesses, allows businesses to accept Bitcoin payments. And the popular payment app Square is rolling out Bitcoin marketplace options that may allow customers to purchase products and services with cryptocurrency. Finally, the payment processor Stripe allows companies to integrate a Bitcoin payment form right into their websites. The IRS is notified of all transactions on these platforms just as all other types of currency transactions are reported. If you sell goods or services through these platforms and only accepted cryptocurrency thinking that the new currency isn’t subject to taxation or the income would be harder to find by the IRS or other tax agencies, think again.
Does the IRS Know About My Cryptocurrency Profits?
Profits on cryptocurrency via methods like speculative trading on the ups and downs of crypto are subject to capital gains taxes just as stock transaction gains that are held less than a year are. Crypto you earn from transacting with goods and services is taxed as ordinary income, broken into the seven federal tax brackets. Even then, there are still a few distinct ways that the income can be viewed; a fixed salary paid by an employer or self-employment income earned for goods and services. Identifying between the two is important and can each have its advantages depending on your unique circumstances, so you should consult with a tax professional on how to structure your income in tax preparation and report your cryptocurrency accurately to the Internal Revenue Service.
One of the most important things to remember is that cryptocurrency isn’t an underground currency as it once was. It’s becoming more mainstream and with that comes regulations from governments and a greater focus on tax collection from governmental tax agencies worldwide. J. David Tax Law estimates there will be tens of thousands of individuals that will receive tax bills for cryptocurrency trading gains and from the sale of goods or services over the coming months.
At J. David Tax Law, our tax attorneys are experts in the taxation of cryptocurrency and the fallout from unpaid taxes on cryptocurrency gains. The article you just read was written by one of our senior attorneys who is a cryptocurrency and taxation expert.
If you are contacted by the IRS about a tax debt from cryptocurrency, call the experts at J. David Tax Law for a no-cost consultation and immediate representation. The sooner you act the lesser the impact will be if the IRS is taking aim at you.
We provide tax solutions for our clients who have IRS and state tax debts, unfiled returns, audits, etc. We advise you on future compliance that enables your individual or business tax problems to be behind you for good.