By now, you have undoubtedly heard about some kind of cryptocurrency tokens; Bitcoin, Ethereum, Litecoin, and even Dogecoin appeared on Saturday Night Live recently. With wildly different prices, these cryptocurrency tokens share the same underlying technology which is the same type of computer code acting as a digital ledger recording information entered and verifing it with all other computers connected to the code. The code and digital ledger system are referred to as blockchain, and blockchain is the innovative technology leading the rapid explosion of an enormous variety of cryptocurrency tokens.
On top of that, with zero commission trading available on most platforms, it’s never been easier to buy stocks or cryptocurrency. Because of this, it’s important to understand where the tokens come from, what makes the tokens valuable, and most importantly, what tax implications result from buying and selling the tokens.
To develop a good understanding of the main three uses of cryptocurrency and the respective tax implications, you will need a good grasp of blockchain technology. The computer code (called blockchain) is really just a digital ledger that connects computers running the same code and allows the code to enter information onto each computer to verify the code without the need for one central location.
In other terms, you can think of it as a list of bank transactions listed on your monthly bank statements; it logs all your transaction information and is stored with the bank in a centralized location. The downside to this is that the data is all in one place, meaning if the data is lost or manipulated, the information can potentially be lost for good. That’s the negative of blockchain. The computers act as the ledger and are able to cross-reference each other to find the correct information and ultimately prevent any type of fraud. In trade for allowing the blockchain to use your computer and electricity, it rewards you with a cryptocurrency token after you have run, or “mined”, enough cross-referencing checks.
Coin Exchanges & Tax Implications
While some things change, many things will stay the same. This even applies in the new world of cryptocurrency. Cryptocurrency is termed a currency because the creators wanted the newly “mined” tokens to become recognized as a legitimate currency that would be accepted for payment in exchange for goods and services.
Nevertheless, for the majority of the time, today cryptocurrency is still being treated like a stock or equity asset. A primary use for crypto is an investment vehicle and it is traded on exchanges exclusively dedicated to crypto, and also offered by brokerage firms.
Because of this, cryptocurrency is reported to the Internal Revenue Service as an asset and is taxed based upon the various capital gains rates. Recognizing this distinction for gains has never been more vital, as the IRS focuses its attention on current cryptocurrency transactions, as well as any potential transactions you previously made.
Maintaining accurate records, having dedicated tax professionals, and a solid understanding of the crypto market can help keep you in good standing and also prevent IRS intervention. In the next article in this series, you will learn how cryptocurrency aspires to be a real type of fiat currency in the near future.
Cryptocurrency Tax Attorney Representation in Jacksonville, FL
At J. David Tax Law in Jacksonville, FL, our tax attorneys are experts in the taxation of cryptocurrency and the fallout from unpaid taxes on cryptocurrency gains.
Over the last eighteen months, we have represented more than 600 individuals who have been pursued by the IRS for cryptocurrency violations of the tax code. Do not get a false sense of security that the IRS cannot locate the taxable income from crypto transactions. The IRS is actively pursuing tens of thousands of people who owe taxes from cryptocurrency trading and it has only just begun.
If you are contacted by the IRS about a cryptocurrency tax debt, call the experts at J. David Tax Law in Jacksonville, FL for a no-cost consultation and immediate representation. You must act quickly in these circumstances.
He is the founder and Managing Partner of J. David Tax Law®. He is the winner of the 2019 Ultimate Tax Attorney awarded by the Jacksonville Business Journal. This award recognizes law firms and attorneys who show exemplary professional talent and skill while demonstrating superior client care, leadership, charitable concern, and civic engagement. Jonathan graduated from Chapman University School of Law. He has practiced law since 2011.
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.
7077 Bonneval Rd Suite 200, Jacksonville, FL 32216