The number of investors in the world of cryptocurrencies is constantly increasing. At the same time, the value of virtual currencies is also increasing at an incredibly fast rate. While some people have not been so successful with their investments, there are those who have gotten insanely rich in a matter of months. Nevertheless, almost all of these people avoid reporting profits on their tax statements.
Back in 2014, the IRS made it clear that investors need to pay taxes on the profits they make from cryptocurrencies. This is when the Internal Revenue Service first provided guidance for taxpayers, which addresses transactions made with virtual currencies with a document known as the Notice 2014-21. However, it was soon revealed that most people simply don’t report their profits. Namely, only 802 investors even mentioned cryptocurrencies on their tax returns in 2015.
One of the main reasons why people don’t mention them is because they think that they can get away with it, since the IRS currently doesn’t do a great job of tracking down transactions. Nevertheless, it’s only a matter of time before they figure it out. “To avoid problems with the government, you should seek help from an accountant who is experienced with digital currency. The last thing you want is to get hit with a hefty fine following your success in the cryptocurrency market,” says Joshua V. Azran of Azran Financial.
Another important reason why people fail to mention cryptocurrencies on their tax statements is because they simply don’t understand the guidance provided to them. First of all, there is this big myth that the Internal Revenue Service treats crypto like a currency. However, this is not really the case. In fact, they treat it like bonds, stocks, or any other kind of investment opportunity. Nevertheless, it looks like virtual currencies will start being treated like currency in the near future. There is currently a bill in the works called the Cryptocurrency Tax Fairness Act, which aims to do this. If and when the bill passes, taxation of digital currency will be much simpler.
However, for now it’s important to remember that you should pay taxes only after you sell a cryptocurrency and make a profit. In other words, if you’ve invested in a certain virtual currency and are holding it, then there is no need for you to be reporting it to the IRS. However, when you sell it, then you should include that information on your tax statements. In fact, you should include it even if you use a cryptocurrency to pay for goods or services.
It doesn’t really matter if you sold a virtual currency for US dollars or used it to buy a new car, the IRS looks at both of these cases like you sold the coins. This is where paying taxes can get a bit complex. In order to properly report your gains and losses, you will need to take every single transaction you made into account. It’s on you to find all the needed information, which can be extremely hard to do. Thankfully, there are some cryptocurrency exchanges that allow you to download transaction reports. If your exchange has this option, then this process will be a lot easier for you. However, if it doesn’t, then you’re going to need to personally record every transaction.
After you’ve gathered all the necessary information, you will have several options to choose from when it comes to calculating capital gains. It’s worth noting that you’re able to deduct your losses on your tax returns if you’ve lost money trading. Nevertheless, you can only deduct up to $3,000 from your taxable income a year. But the good news is that your losses won’t expire, so you’ll be able to carry them forward for years.