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Tag Archive for Bitcoin

What Businesses Need To Know About The Tax Treatment Of Bitcoin And Other Virtual Currencies

Over the last several years, virtual currency has become increasingly popular. Bitcoin is the most widely recognized form of virtual currency, also commonly referred to as digital, electronic or crypto currency.

While most smaller businesses aren’t yet accepting bitcoin or other virtual currency payments from their customers, more and more larger businesses are. And the trend may trickle down to smaller businesses. Businesses also can pay employees or independent contractors with virtual currency. But what are the tax consequences of these transactions?

Bitcoin 101

Bitcoin has an equivalent value in real currency and can be digitally traded between users. It also can be purchased with real currencies or exchanged for real currencies. Bitcoin is most commonly obtained through virtual currency ATMs or online exchanges.

Goods or services can be paid for using “bitcoin wallet” software. When a purchase is made, the software digitally posts the transaction to a global public ledger. This prevents the same unit of virtual currency from being used multiple times.

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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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Paying Taxes On Bitcoin And Other Forms Of Cryptocurrency

With exponential gains in value and thousands of new retailers now accepting it as payment, Bitcoin has suddenly become one of the hottest discussion topics around the country. Bitcoin (BTC) is currently the most circulated virtual currency (also referred to as cryptocurrency, or “crypto”) in the world and can be exchanged for U.S. dollars, Euros, and other real or virtual currencies like Ethereum (ETH) and Ripple (XRP).

You may spend virtual currency to pay for products or services, or you may treat it like an investment or commodity and hold onto it. But how is a virtual currency like Bitcoin taxed and treated by the IRS? Do you have to pay taxes on Bitcoin? Depends on what you do with it.

  • How is virtual currency like Bitcoin handled for federal tax purposes?

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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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Are Virtual Currencies Taxable?

With virtual currencies like Bitcoin becoming more mainstream in recent years, we often get asked if revenue from the sale or exchange of these digital dollars is taxable. The simple answer is, YES – income (or profit) from virtual currency transactions is reportable on your income tax return. However, because this is still a relatively new phenomenon, there are a few things you should be aware of to make sure you don’t get caught with a huge tax bill!

Virtual currency, as generally defined, is a digital representation of value that functions in the same manner as a country’s traditional currency. Bitcoin is one example of a convertible virtual currency which can be digitally traded between users and purchased for, or exchanged into, U.S. dollars, Euros and other real or virtual currencies. There are currently more than 1,500 known virtual currencies. Because transactions in virtual currencies can be difficult to trace and have an inherently anonymous aspect, some taxpayers could be tempted to hide taxable income from the IRS. Read more

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

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

Taxes And Virtual Currencies: What You Need To Know

Bitcoin, blockchain, cryptocurrency… Digital and virtual currencies are all the rage lately. However, just because there isn’t a physical coin in hand, doesn’t mean they are shielded from taxes. Following are some virtual currency tax consequences you must know if you decide to dip your toe in that world.

“While Bitcoin is the most popular virtual currency there are many others (e.g. Ripple, Ethereum, Lite Coin, etc.). The IRS rules on income recognition apply regardless of which virtual currency you’re using.” — Ren Cicalese III, CPA, MST

The IRS Is Paying Close Attention Read more

Is Bitcoin As Good As Gold?

Joe Barbieri, Tax Connections

Gold and Bitcoin have been used synonymously as safe havens and currencies. What is a safe haven? It is a place to park wealth or money when there is a high degree of uncertainty in the environment. It has to be something that everyone can believe in even if the current institutions, governments or players in the business game are not available. The wealth has to be kept safe in times of trouble. What are the risks to someone’s wealth? There is theft by robbery if it is a physical asset. There is damage by fire, flood or other elements. There is the legal issue in not being able to determine if the asset is really yours or not. There is access risk in that you may own the asset but may not be able to get your hands on it. You may own the asset but may not be able to use it due to some restriction. Who else do you have to rely on to be able to use your wealth – spending it, investing it or converting it into different units of measure (currencies)? Read more