Cryptocurrency has slowly moved into the center stage for all kinds of transactions. Bitcoin is the primary digital currency that is fast catching up with “real currency.” Now that many retailers have started accepting cryptocurrencies and even employees being paid through Bitcoin, it is important to start reporting them. The government has started publishing important rules and regulations related to tax reporting of digital medium of exchange.
Consider them as Capital Assets
Tax principles laid down for property transactions apply to Cryptocurrency too. Now you need to start treating Bitcoin as a “Property” when it comes to tax laws. If you incur a profit or loss through Bitcoin transactions, then you will be taxed under the “Capital gain or loss” rules.
Usage of Cryptocurrency for payments related to goods and services comes under Income Tax
Payment of salaries through Bitcoin means companies need to report salaries of the employees through W-2 forms or IRS.
- Salary paid in digital currency has the same value as that of dollar wages.
- Employers should calculate the value of Bitcoin in comparison to US Dollars and keep a record of all the payments made. Make sure you note down the date on which you made the payments.
Even employees need to report their Bitcoin earnings through W-2 forms. Self-employed people need to convert the digital currency into the dollar. Further, that has to be reported their profit or loss while filing their tax returns.
Miners need to report reception of Bitcoin as income
There are individuals who “mine” cryptocurrency. Income Tax authorities have made it clear that miners need to maintain a transaction ledger of their “mining” activities and treat it as a profit. Earnings made through “Bitcoin Mining” should be treated as gross income. Every Bitcoin miner needs to pay his or her gross earnings based on “self-employment tax.” Rules.
You really don’t want to hide anything from the IRS
It may occur to you that if no one is reporting your capital gains to the IRS, no one really knows about your investments. “It is never a good idea to try to skip out on your taxes,” says Janna Herron to CNN Money. “You really don’t want to hide anything from the IRS. In the future they may discover that you owe, there will be penalties and fines involved in that.” Even though the notice on cryptocurrencies is guidance and not regulation, it does comment on penalties.
“It says that taxpayers may be subject to penalties for not reporting,” says Morin. “The best way to avoid penalties is to do the best you can with the reporting. That will show that you didn’t have a willful intent to avoid taxes.” In some extreme situations, “taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions,” the IRS said in a statement released Friday. And the penalties are steep: anyone convicted of tax evasion, for example, is subject to a prison term of up to 5 years and a fine of up to $250,000.
You’ll need to gather the following information
Since the IRS determines cryptocurrencies to be property, like stocks or real estate, you’ll need to pay taxes if you’ve realized a capital gain and you can lower your tax bill if you’ve taken a loss. You’ll need to gather the following information: 1) when you bought the crypto, 2) how much you paid for it, 3) when you sold it, and 4) what you received for it.