Bitcoin rose above $52,000 on February 17th and has gained over 400% in 12 months. If you were lucky and bought bitcoin when it was worth less, you are sitting on big gains, which is why it is important to understand that the IRS views bitcoin and other cryptocurrencies as assets. Not currency and not securities. This means “cryptos” are subject to taxes on capital gains, just like stocks and mutual funds. Used your digital currency to buy something? You’ll owe taxes on the difference between what you paid for it and its value when you used it to make a purchase. A taxable transaction occurs if you sold a crypto for cash or even traded one crypto for another!
The IRS (and Fuoco Group) has often reminded taxpayers that cryptocurrency profits are taxable, there is now a line on Form 1040 asking whether you’ve bought or sold virtual currency. The profit is taxable as a short-term gain if a position has been held for a year or less, as long-term if held for more than a year. Remember the IRS is very unforgiving, just because you did not receive a 1099-K form does not mean you are absolved of the obligation to report all sales and dispositions. The IRS wants millions of crypto holders who aren’t complying with the law to file the required forms even though they are burdensome and think the taxes are unfair.
Bitcoin has gained high-profile adoption by some organizations starting to “dabble” in cryptos like BNY Mellon, MasterCard, and Tesla which has bought $1.5 billion worth of bitcoin and plans to start accepting the cryptocurrency as a form of payment. However, the volatility of bitcoin is the #1 concern among financial executives, with regulatory concerns coming in a close #2. A recent Gartner survey said 84% of financial executives do not plan to include bitcoin among their corporate assets due to concerns about financial instability. Even though it may seem now is the time to jump on the bandwagon, beware the bitcoin bubble and tread lightly if trading due to tax concerns.
Certain risks present in the crypto market that are not as prevalent in traditional financial markets for stocks and bonds. Crypto exchanges have been hacked and security breaches have led to sizable losses for investors who have had their digital currencies stolen. Frauds and scams are also rampant in the crypto industry. Keep in mind that not all blockchain projects succeed and it may be sooner rather than later that regulators crack down on the entire crypto industry. Down the road, there may be other ways to potentially profit from blockchain technology besides investing directly in cryptocurrencies. As your tax advisor, we advise you to always be sure your choices are well-informed and your transactions are tax –efficient.
Reach Out To Us: “Mining,” “Staking,” “Airdrops,” “Splitups,” and gifting of cryptos create tax issues. Offshore crypto though not subject to FBAR and FATCA reporting, is not exempt from the mandate to report a sale at a gain. We have touched on only a few scenarios in this brief article. Please consider engaging the services of tax professionals who understand the crypto terrain very well, to steer clear of troubled waters. Call us toll free at 855-542-7537.
