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Archive for Cryptocurrency

Virtual Currency: IRS Issues Additional Guidance On Tax Treatment And Reminds Taxpayers Of Reporting Obligations

Cryptocurrency And IRS

As part of a wider effort to assist taxpayers and to enforce the tax laws in a rapidly changing area, the Internal Revenue Service today issued two new pieces of guidance for taxpayers who engage in transactions involving virtual currency.

Expanding on guidance from 2014, the IRS is issuing additional detailed guidance to help taxpayers better understand their reporting obligations for specific transactions involving virtual currency. The new guidance includes Revenue Ruling 2019-24 and frequently asked questions (FAQs).

The new revenue ruling addresses common questions by taxpayers and tax practitioners regarding the tax treatment of a cryptocurrency hard fork. In addition, a set of FAQs address virtual currency transactions for those who hold virtual currency as a capital asset.

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Five Myths About Cryptocurrency Taxation

Myth No. 1

There is no need to report any gain or loss for exchanges between one cryptocurrency and another if the transaction occurred before January 1, 2018. That is not true. Every time when you sell a cryptocurrency, whether for fiat currency or another cryptocurrency (e.g. sell Bitcoin for Ethereum), you need to report the transaction and calculate gain or loss for tax purposes. Many people thought an exchange between two cryptocurrencies qualified for section 1031 like-kind exchange if it was done before January 1, 2018. Under the new tax law signed by the President on December 22, 2017, only real property qualifies for section 1031 like-kind exchange tax treatment starting 1/1/2018. However, it does not mean that cryptocurrency qualified for like-kind exchange tax treatment before the new law kicks in. There is no tax law, old or new, supports the conclusion that cryptocurrency ever qualified for like-kind exchange tax treatment. People taking such position are at risk for losing their battle with IRS.

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What Does Trading Cryptocurrency Daily Mean For My Taxes?

Cryptocurrency and Taxes

From a technical perspective cryptocurrency is very easy to trade. Sign up to an exchange, deposit some fiat currency, and with just a couple of clicks one can become the new owner of some Bitcoin, Ethereum, or another coin that has taken the world of digital investments by storm. But while cryptocurrency may be easy to acquire, did you know it’s a terrible headache to deal with tax-wise?

It’s true! And this applies especially to cryptocurrency transactions you make frequently. Whether buying, selling, or exchange (trading one crypto for another), when investing in crypto beyond there are a number of factors you really need to keep in mind, especially with the IRS’s new interest in it.

Understand Cryptocurrency

Cryptocurrency is treated as property. This means any profits you make are treated as a capital gain. While your currency may be innovative and digital, the IRS approach to it is historic and old school. You made money from the growth of value in a financial asset, and upon such time as the value of the asset is realized, the government will expect a cut of the profit.

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Is Bitcoin Money?

What is money? Money is a measurement unit for the purpose of exchange. Money is used for valuation of goods, settling debts, accounting for work performed, and standardizing the measurement of production. Money has to be divisible, portable, stable in value, easy to obtain, durable over time and must be trusted by all parties using it.

Imagine money that is too large to divide into pieces, heavy to carry, spoils after 2 days, gets damaged easily or can be eaten by animals? If these are the characteristics of the currency, it would not be that useful and many business deals would not happen.

The most important element of money is trust. If you work for someone and you are not sure if you will get paid, would you do the work? If you did the work, and you got paid for something that was not accepted in many places, is it a valid payment? The economy and money system are built on trust, and it can be broken by a lack of trust by the majority of people.

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Is Bitcoin The De Facto Reserve Cryptocurrency?

What is a reserve currency? This is the currency in which all other currencies are standardized against, and this measure is used for global trade, asset valuation, and account settlement. The current reserve currency is the U.S. dollar since it was the strongest currency after World War 2. The strength of the currency was based on its trade position, political influence, military might, resources available and liquidity/recognition in the investment world.

In the cryptocurrency world, Bitcoin serves this function as other cryptocurrencies are converted into Bitcoin to access most exchanges. Since Bitcoin has the brand recognition of being the first known cryptocurrency, it has the advantage of breaking milestones first.

Bitcoin was the largest cryptocurrency by market cap at the time of writing (January 2018), the first coin to be created in 2009 and the first currency to be utilized for futures trading around the world. Bitcoin is also the first decentralized currency in recent time, as there have been digital and electronic currencies created before and after Bitcoin that are not decentralized.

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Reporting Virtual Currency Transactions

With the price of Bitcoin hitting record highs in 2017, many Bitcoin holders cashed out not realizing the impact it could have on their tax bill. Many people, for example, did not understand that it was a reportable transaction and found themselves with a hefty tax bill–money they may have been hard-pressed to come up with at tax time. Others may have been unaware that they needed to report their transactions at all or failed to do so because it seemed too complicated.

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Blockchain And Corporate Taxation: Change Is Coming

While the technology can sound quite complex, a blockchain is essentially an immutable, distributed ledger. This means that instead of a single, third-party record holder, every authorized party within the blockchain holds an instantly updated record of all transactions. Blockchain maintains data integrity this way because it’s virtually impossible to alter the data of every single ledger. Any discrepancies found will be compared against every ledger and any fraudulent data found will be disregarded. Read more

Another Cryptocurrency Primer Of Our Cyber Universe: Who, What, And Why They Differ

  1. Who are the major players I think you should be aware of
  2. What’s a DAO (Decentralized Autonomous Organization)?
  3. If Cyber Currency is so Great, Why are there so many challenges in the Community?
  4. My Crystal Ball

The cryptocurrency, or digital currently world is complex with a few core leaders and hundreds, if not thousands, of related active alternatives. All are predicated on the concept of the Blockchain or often referred to as the Distributed Ledger Technology (DLT). While the core history of Bitcoin and its related alternatives is fairly accessible via a simplified web search, popular media, and even “analog” books, I have determined that far too many do not understand the differences and similarities between and among these various alternative coins (Alt Coins). Read more

What Is Cryptocurrency?

There is plenty of misunderstanding about the definition of cryptocurrency. Wikipedia’s well-researched entry on the topic defines “cryptocurrency” as follows (with their links included):

[Cryptocurrency is] a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Cryptocurrencies are a type of digital currencies, alternative currencies and virtual currencies. Cryptocurrencies use decentralized control as opposed to centralized electronic money and central banking systems. Read more

Do Not Let Cryptocurrency Crimp Your Relationship With The IRS

Cryptocurrencies such as Bitcoin are becoming more popular as a form of payment and as investment. However, there has been little attention paid to how this virtual currency will be treated by the IRS until now. In fact, the IRS is taking a much closer look and has established some tax guidelines.

According to an article published in accountingtoday.com, “For federal tax purposes, virtual currency is treated as property and not currency.” They add, “The fair market value of the virtual currency on the date of receipt determines the taxpayer’s basis.”

Some businesses are actually paying employee wages in virtual currency instead of U.S. dollars. Read more

The Crypto Battlefield: Financial Visionaries Vs. The Regulators

Mark Twain has been credited with expressing that “History doesn’t repeat itself but it often rhymes,” Regardless of who crafted the sentiment; it is clearly consistent with my experience associated with some disruptive technologies that are showing up in today’s financial markets.

Philosopher Arthur Schopenhauer once stated, “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”

Distributed Ledger Technologies (DLT), the underlying software system that is simply and commonly referred to as Blockchain is an example of this “Truth”. This DLT system uses the collective computing power of many autonomous systems all agreeing on factual transactions covered by a specific ledger (e.g. Bitcoin, Litecoin, Dash, etc.). Read more

Is Your Cryptocurrency IRS Approved?

Cryptocurrencies such as Bitcoin are becoming more popular as a form of payment and as investment. However, there has been little attention paid to how this virtual currency will be treated by the IRS until now. In fact, the IRS is taking a much closer look and has established some tax guidelines.

According to an article published in accountingtoday.com, “For federal tax purposes, virtual currency is treated as property and not currency.” They add, “The fair market value of the virtual currency on the date of receipt determines the taxpayer’s basis.”

Some Businesses Are Actually Paying Employee Wages In Virtual Currency Instead Of U.S. Dollars Read more