A Guide to Pay Cryptocurrency Taxes

Cryptocurrencies outperformed every traditional asset, and 2017 was a lucky year for these digital currencies. The value of cryptocurrencies amplified by 900% and it gives a staggering increase in its value. The investors owe a good chunk of taxes to IRS. Every investor has to understand the implications of Cryptocurrency Taxes. As per IRS, the cryptocurrency is similar to a tax on property. The treatment of these currencies is identical to tangible assets, such as raw materials and gold. The cryptocurrencies are not treated as currencies, so there is no need to worry about foreign currency losses or gains. Once you start earning from cryptocurrencies, you will get tax liabilities. It is complicated to understand the implication of tax laws on virtual currencies. 

Guidance of IRS for Virtual Currencies

The IRS (internal revenue service) is clear about its taxation. They claim that each transaction of cryptocurrencies is taxable by law. They offer guidance for the application of tax principles on the transactions of virtual currency. As per this guidance, the cryptocurrencies are treated as properties instead of a currency. These convertible currencies are equivalent in the value of the actual currency and act as a supernumerary for real currency. 

Some people consider that bitcoin is similar to cash or dollar. As per IRS, the Bitcoin must be treated as bonds, stocks or house. You must follow the general taxation principles for property and their impact on losses or gains. If you have not sold any bitcoin, you have not any gain, so there is no reporting obligation on you. After selling any cryptocurrency, you are liable to report your losses and gains.

Main Tax Implications on Cryptocurrency

See the conclusion on taxes and cryptocurrency in the United States for traders and investors. 

• Cryptocurrency is traded to fiat the currency, such as the dollar and it is the taxable event
• The trading cryptocurrency can be the taxable event, and you must calculate the worth of  fair market in USD while trading
• Use of cryptocurrency for services and goods can be a taxable incident. You should figure taxes in USD while trading. You may owe sales tax in the end.
• If you are giving the cryptocurrency in form of gift, this event is not taxable. The recipient of this gift inherits the price basis. The tax will be applicable if the gift exceeds the exemption amount of gift tax. 
• Transfer from one wallet to another wallet is not taxable. You may transfer between wallets or exchanges without any capital gain. You should check the records against trades and count the transfers as the taxable happenings as a harmless harbor.
• You can purchase cryptocurrency with US dollars, and it is not the taxable happening. You may not discern any gain until you sell, use or trade crypto. By holding it for a more extended period, you can realize capital gains in the long-run. If you have less than one year, you will discern short-range capital losses and gains. 

Anything else than transferring, holding or buying the cryptocurrency is also taken as taxable event because you will realize capital losses and gains at the value of the fair market. 

Determine the Cost Foundation of Virtual Currency

Calculation of your taxes is to get the cost foundation for holdings. The cost foundation may be purchase price and other associated costs with the purchase of cryptocurrency along with other associated costs with purchasing of cryptocurrency. Cost foundation may include brokerage commission and transaction fees. You can calculate the cost basis for holdings to do following calculations:

(Purchase Price + Extra Fees) / Holding Quantity = Cost Basis

The cost that you can include in the foundation is less than the price you may pay in taxes. You have to determine the basis to calculate loss or gain at the time of sale with the help of this formula.

Sale Cost – Cost Basis = Loss/Gain

Fair market worth is an essential factor for the transactions of cryptocurrency. You have to determine the fair market worth for cryptocurrency taxation. The price history of cryptocurrency can be a reference. You can use close, average or open price for an available data to apply the tax treatment on all transactions. Keep it in mind that you have to pay taxes after using cryptocurrency; otherwise, you will bear its consequences.