By now, you have probably heard about some form of cryptocurrency tokens; Bitcoin, Ethereum, Litecoin, and even Dogecoin made a cameo on a recent Saturday Night Live episode. These cryptocurrencies have wildly different prices, and the underlying technology of these tokens is the same type of computer code acting as a digital ledger, recording information entered, and verifying it with all other computers that are connected to the code. Blockchain is the term used for the computer code and digital ledger system. This innovative technology is leading the rapid explosion of a vast variety of cryptocurrency tokens.
Moreover, it’s never been easier to buy stocks or cryptocurrency with most platforms offering zero commission trading. Due to its complex nature, it’s important to understand where the tokens come from, what makes them valuable, and most importantly, what tax implications result from buying and selling them.
To better understand the three main uses of cryptocurrency and their respective tax implications, a good grasp of blockchain technology is necessary. Blockchain (the computer code) is really just a digital ledger connecting computers running the same code while allowing the code to enter information onto each computer to verify it without the need for storing it in one central location.
In other terms, you can think of it as a list of bank transactions listed on your monthly bank statements; the statement logs all your transaction information and stores it with the bank in a centralized location. The downside is that it’s all in one place, meaning if it’s lost or manipulated, the information could potentially be lost for good.
That’s the downside of blockchain. Because all of the computers act as the ledger and can cross-reference each other to find the correct information, any type of fraud can be prevented. In return for allowing the blockchain to use your computer and electricity, after you have run, or “mined”, enough cross-referencing checks, you are rewarded with a cryptocurrency token.
Tax Implications of Coin Exchanges
Some things will change, but many will stay the same. This is even true in the new world of cryptocurrency. Cryptocurrency was coined a currency because its creators wanted the newly “mined” tokens to become a legitimate currency recognized, and accepted for payment in exchange for goods and services.
That said, for the most part, today, cryptocurrency continues to be treated just like a stock or equity asset would be treated. An investment vehicle is one of the main uses for crypto and is offered by brokerage firms and traded on exchanges exclusively dedicated to crypto.
As a result, cryptocurrency gets reported to the Internal Revenue Service as an asset and is taxed based upon the various capital gains rates. As the IRS is focusing its attention on current cryptocurrency transactions, as well as potential transactions you previously made, it has never been more important to recognize this distinction for gains.
Keeping accurate records, dedicated tax professionals and a strong understanding of the crypto market can help prevent IRS intervention and keep you in good standing. The next article in this series will take a look at how cryptocurrency aspires in the near future to be a real type of fiat currency.
At J. David Tax Law in Orlando, FL, our tax attorneys are experts in the taxation of cryptocurrency and the fallout from unpaid taxes on cryptocurrency gains.
During the last eighteen months, our firm has represented over 600 individuals being pursued by the IRS for cryptocurrency violations of the tax code.
Do not develop a false sense of security that the IRS cannot locate the taxable income from crypto transactions. The IRS is pursuing tens of thousands of people who owe taxes from cryptocurrency trading and it is only the beginning.
If the IRS contacts you about a tax debt from cryptocurrency, call the experts at J. David Tax Law in Orlando, FL for a no-cost consultation and immediate representation. You can’t afford to wait.
He is the founder and Managing Partner of J. David Tax LawSM. 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.