If you're dabbling in cryptocurrencies or are planning on getting into it while it's hot, there's one important detail you should know about - the IRS will want a piece of that action. Ever traded Bitcoin, Monero, Ethereum, Litecoin and any other cryptocurrency? Well, better get ready, the good old taxman is coming after you.
Now with everything you've learned about cryptocurrencies so far, you may be wondering aren't they supposed to be free from government regulation? Well, here's the thing. The transactions on a cryptocurrency's blockchain may be free from centralized control but there's a catch - they are legally taxable.
And according to the IRS, the troubling part is this - people are not paying their cryptocurrency taxes as they should.
Your cryptos are taxable as property
Why are cryptocurrencies even taxable? Well back in 2014, the IRS classified virtual currencies (including cryptocurrencies) as property rather than as legal currencies.
This means your cryptos like Bitcoin should be treated like they're stocks or bonds and any capital gains and losses from their sale should be properly reported via IRS Form 8949 (Sales and other Dispositions of Capital Assets.)
For example, if you're lucky enough to have bought one Bitcoin back when it was still hovering around $1,000 and sold it off at its peak last year at $7,000, that's a gain of $6,000. Based on your income bracket, you'll have to pay the appropriate taxes for this gain.
Cryptocurrency miners are not exempt from owing taxes for their gains either. Miners are required to disclose the value of any cryptocurrency they mine as part of their gross income, too. If they filed as a cryptocurrency mining business, they will have to pay self-employment taxes, as well.
What if you decided to get off a cryptocurrency train and sold yours for a loss? You will have to disclose these too and you can potentially get a tax deduction.
People are not paying their crypto taxes as they should
The cryptocurrency party may just be starting but the government will likely crack down on crypto tax evaders soon. In fact, the IRS is already reviewing Coinbase's customer data and will definitely start chasing after traders who had big cryptocurrency gains but neglected to disclose them.
Let's check the figures. According to the IRS Affidavit for Coinbase, out of 14,000 Coinbase users who have traded $20,000 worth of Bitcoin in 2013 to 2015, only 800 to 900 taxpayers have disclosed their gains. This definitely suggests that Coinbase traders are not properly disclosing their Bitcoin gains.
And these numbers grew even more during Bitcoin's surge last year. Analysts are saying that U.S. traders may owe around $25 billion in cryptocurrency tax liabilities in 2017! Now, that's plenty of owed moola the U.S. government can't just ignore.
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