Cryptocurrencies have been gaining momentum in the last few years and arguably even more in the recent months. More people are interested in them and are involved in trading and investing in this asset class. And now thanks to services, such as Robinhood, it is relatively easy to invest any amount of money in them.
How does the IRS define cryptocurrency?
Cryptocurrency, or rather a virtual currency, is “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” Cryptocurrency falls under that definition as it uses cryptography to verify and secure transactions. The most common example of it in recent years has been Bitcoin, but the number of the altcoins (another name for cryptocurrencies) has grown into more than seven thousand.
Even though majority of the coins are very small, as measured by their market cap, many of them are large enough to create a robust market for them. Bitcoin for example, has a market cap of nearly 1 trillion dollars. Together with other cryptocurrencies, it has been added to many trading platforms, such as Robinhood, and is being traded around the world 24/7. Any gains or losses from investing are taxable and the IRS requires them to be included in the tax return.
How to report crypto on taxes?
To file the cryptocurrency transactions with a tax return, you need to fill out Form 8949 – Sales and Other Dispositions of Capital Assets and include it on Schedule D. This form is also used to report capital gains and losses on all kind of properties.
It is recommended to keep a good track record of purchase, or exchange, dates and price of each particular cryptocurrency that triggers a taxable event. Exchanging one cryptocurrency, for example Bitcoin, for another, for example Ethereum, is considered a taxable event and dollar amounts have to be assigned to this exchange. Subsequently, a profit or a loss from this exchange has to be listed on Form 8949. Finally, once you dispose of the cryptocurrency, you have to list the price at which it was acquired or exchanged, and the sale price. That will create another taxable event that goes into the form.
What if I get paid in virtual currency?
Stories of people getting paid – for goods or services – in virtual currencies are more common these days. Even though this may be a novelty approach, it doesn’t change the fact that the IRS still considers this form of payment as income. To determine the value of that payment, a fair market value is taken in U.S. dollars as of the date of payment.
What about the cryptocurrency miners?
Individuals who engage in mining crypto currencies are essentially independent contractors. Revenues are proceeds received for the currencies mined and all the costs that go into mining the coins are considered expenditures. Gross income after deductions and credits is considered taxable income.