Regulators are catching up to the underground world of cryptocurrency — and they want their share.
If you’ve been successful in the bitcoin trade business in the past, you may discover a heavy tax burden leaves you with little to no profit. And since that can get frustrating, many traders hide behind anonymous IDs.
That, and the fact that bitcoin offers “a transparent window into wallet addresses and transactions,” makes it incredibly difficult for regulators to track them down.
But as the cryptocurrency gains popularity and value, the Internal Revenue Service, along with other governmental institutions around the globe, are taking notice.
According to MarketWatch, the IRS alleges only a small fraction of the hundreds of thousands of users at the Coinbase crypto exchange actually reported gains and losses from bitcoin trades.
“It’s getting trickier to hide from the U.S. government, however, after a judge ruled in November that Coinbase, which initially refused to voluntarily turn over the information, must now report all transactions worth $20,000,” MarketWatch reported.
Don’t understand how taxation works (for the IRS) in the cryptocurrency world? Here’s a breakdown, according to the IRS, the Verge and MarketWatch:
- Virtual currency is treated as property. If you were paid for goods or services in bitcoin, it gets taxed as ordinary income.
- Depending on your income bracket, the federal tax rate can be anywhere from 10 to 39.6 percent.
- Bitcoin is also subject to state income tax.
- If your bitcoin account is held abroad “where the private keys are owned directly by the exchange,” the value of the account has to be reported to the U.S. Treasury using FinCen form 114, and to the IRS with the form 8938.
- U.S. citizens and residents with less than $10,000 of assets abroad don’t have to report.
- If you sold your crypto for more than you actually bought it for, you owe money.
- Anytime you sold bitcoin or used it to buy anything, you were accruing taxable income. Example: If you buy $50 worth of bitcoin and then when it doubled you used it to buy something worth $100, you owe $50.
- Even exchanging bitcoin for Ethereum or another cryptocurrency platform is taxable.