These days more businesses and individuals are investing their money into cryptocurrency. It is important to realize all cryptocurrency transactions are taxable events that will need to be reported to the internal revenue services IRS. Crypto tax can be difficult to understand on your own, if not properly accounted for you may end up owing taxes that you are not prepared for. Our tax professionals can help you track your crypto transactions and pay taxes for all crypto exchanges.
The IRS shares this information about cryptocurrency:
What is Virtual Currency?
Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency (i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance), but it does not have legal tender status in the U.S. Cryptocurrency is a type of virtual currency that utilizes cryptography to validate and secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.
Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.
The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability.
The IRS issued IRS Notice 2014-21, IRB 2014-16, as guidance for individuals and businesses on the tax treatment of transactions using virtual currencies.
The IRS also published Frequently Asked Questions on Virtual Currency Transactions for individuals who hold cryptocurrency as a capital asset and are not engaged in the trade or business of selling cryptocurrency.
For more information regarding the general tax principles that apply to virtual currencies, you can also refer to the following IRS Publications:
- Publication 525, Taxable and Nontaxable Income, for more information on miscellaneous income from exchanges involving property or services,
- Publication 526, Charitable Contributions, for more information on charitable contribution deductions,
- Publication 544, Sales and Other Dispositions of Assets, for more information about capital assets and the character of gain or loss,
- Publication 551, Basis of Assets, for more information on computation of basis, and
- Publication 561, Determining the Value of Donated Property, for more information on the appraisal of donated property worth more than $5,000.
What Are The Most Popular Types of Cryptocurrency?
Bitcoin is regarded as the first decentralized cryptocurrency using blockchain technology to facilitate payments and digital transactions. Instead of using a central bank to control the supply of money in an economy (like the Federal Reserve in tandem with the U.S. Department of the Treasury) or third parties to verify transactions (such as your local bank, credit card issuer, and the merchant’s bank), Bitcoin’s blockchain acts as a public ledger of all transactions in the history of Bitcoin. That ledger allows a party to prove they own the Bitcoin they’re trying to use and can help prevent fraud and other unapproved tampering of the currency. A decentralized currency can also make peer-to-peer money transfers (like those between parties in two different countries) faster and less-expensive than traditional currency exchanges involving a third-party institution.
- Ether (Ethereum)
Ether is the token used to facilitate transactions on the Ethereum network. Ethereum is a platform that uses blockchain technology to enable the creation of smart contracts and other decentralized applications (meaning the software doesn’t have to be distributed on app exchanges like Apple’s (NASDAQ:AAPL) App Store or Alphabet’s (NASDAQ:GOOGL)(NASDAQ:GOOG) Google Play Store, where they might have to give a 30% cut of any revenue to the tech giants). Thus, Ethereum is both a cryptocurrency (the actual coins are measured in units called Ether) and a software development sandbox.
- Binance Coin
Binance Coin is available on the Binance cryptocurrency exchange platform (along with other digital coins that are available for trading). Binance Coin can be used as a type of currency, but it also facilitates tokens that can be used to pay fees on the Binance exchange and to power Binance’s DEX (decentralized exchange) for building apps.
- XRP (Ripple)
XRP is a digital currency based on the digital payments platform RippleNet, built by the company Ripple. It was designed for financial institutions to scale digital payments across the globe and reduce transaction costs associated with typical cross-border funds transfers. Short-term lines of credit can also be extended using XRP.
Tether is what’s known as a stablecoin, a currency tied to a fiat currency — in this case, the U.S. dollar. The idea behind Tether is to combine the benefits of a cryptocurrency (such as no need for financial intermediaries) with the stability of a currency issued by a sovereign government (versus the wild price fluctuations inherent with many cryptos).
Originally made as a joke poking fun of rampant speculation on cryptocurrencies, Dogecoin has skyrocketed in value, thanks to support from the likes of Tesla (NASDAQ:TSLA) CEO Elon Musk and investor and Dallas Mavericks owner Mark Cuban. It features a meme of a Shiba Inu dog as a “mascot” and was made to be used a form of digital payment like Bitcoin. However, Dogecoin makes it quicker and easier for payments to be recorded, but it also has no limit on how many coins can be created over time (unlike Bitcoin, which was designed with a cap on how many coins there can be).
Affordable Tax Help Near Me
The team at King Financial Services is here to help you resolve even the most difficult tax issues. We understand how difficult of a position it is to owe the IRS money. Not only do we help you get the most out of your tax returns, we also help you find solutions that fit your specific needs.
We are home to two Enrolled Agents, who are empowered by The United States Treasury to prepare your personal or business tax filing. Don’t waste your time calling one of the large advertisers that claim to solve your problems for pennies on the dollar, instead take the time to talk to your trusted, local tax expert.
King Financial Services Inc
610 S Industrial Blvd. Suite 140
Euless, TX 76040
Phone: (800) 503-1343
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