Many embraced cryptocurrency because it had the potential to be a very lucrative investment. It also left few traces of financial activity. The Internal Revenue Service likes seeing records and accountability, so it is no surprise that it stepped in to levy taxes on cryptocurrency or virtual currency.
Property not currency
Bitcoin and other virtual currencies market themselves as an alternative currency along the same lines as a credit card, but the IRS sees it otherwise, characterizing it as property. In fact, using this format may even mean owing capital gains taxes because virtual currency increases and decreases in value. So the owner may celebrate their windfall of the increased value, but the IRS wants its piece of the windfall as it would when selling art, stamps or real estate.
Owners may like that lack of a paper trail, but the IRS nonetheless expects cryptocurrency owners to keep old fashioned records regarding transactions and value. The IRS measures fair market value in dollars at the time of the payment for both the buyer and seller.
Other ways virtual currency is taxed
Capital gains taxes are not the only option for the IRS. The agency will levy taxes in other situations:
- Those paid for work in cryptocurrency are still earning wages and, therefore, taxed as earned income. This includes contractors who must pay self-employment taxes.
- Those who earn revenue in cryptocurrency must list it as business income.
- Virtual currency that is an “initial offering” falls under a specific set of tax obligations.
Still a quickly evolving issue
The government is famously slow to change. However, its pace increases when it involves taxes and finance. The SEC now looks at them as it would stocks, and some states have also updated its laws regarding virtual currency. In the case of Texas, the state still expects its cut of wages or transactions, but it does not accept payment of said taxes (or other taxes) using cryptocurrency.
Those with concerns regarding tax obligations can speak with an attorney with a background in tax law. They can provide the most up-to-date information and even help clients navigate these confusing new regulations.