CryptoTaxPrep.com Presents: Frequently Asked Questions About Cryptocurrency Taxes


– [Narrator] Frequently asked questions about cryptocurrency taxes. Millions of people invest
in cryptocurrencies to the tune of billions of dollars in trading volume worldwide. With the increasing legitimacy of Bitcoin and other cryptocurrencies, these assets are becoming more and more
popular in the investment world. However, most people aren’t really sure what virtual currencies
are, how they work, or how they impact their tax liability. If you’ve bought or sold
cryptocurrency this year, you may be wondering how or whether you should report your
earnings or losses to the IRS. A qualified cryptocurrency accountant has the skills and expertise to guide you through the upcoming tax season in a manner that limits your tax exposure and gives you critical peace of mind about your financial security. The licensed, certified public
accountants at Happy Tax have been trained on the
latest rules and regulations affecting cryptocurrency investors, and the company has become a one-stop shop for all of your needs this tax season. Before you dive in, however, here are some frequently asked questions that many cryptocurrency
investors may want to consider. What is cryptocurrency? Cryptocurrency, also
known as digital currency, virtual currency, coins, or tokens, is a type of electronic payment. It doesn’t exist in physical form like traditional bills and coins, but it can be used to
purchase goods and services. Some tokens are restricted to
certain online communities, while others are increasingly available as retail payment methods in
lieu of cash or credit cards. Is cryptocurrency regulated by the IRS? Yes. The IRS issues a policy notice in 2014 expressly stating that Bitcoin
and other virtual currencies are taxable as property. While many investors believe
that digital currencies fall under loopholes or
exemptions to the tax code, this is far from the case. The IRS is ramping up enforcement against cryptocurrency investors, and the agency is even
going after investors retroactively as far back as 2013. Why does the IRS tax
virtual currency as property rather than legal tender? In many ways, virtual currency operates just like legal tender. It can be exchanged, used for purchases, loaned out, or given away. It is a store of value
and a medium of exchange, but it is not considered legal tender in any US jurisdiction. In the United States,
the federal government is the only entity that can
officially create money, and it has established the
dollar as the legal tender. Unless Bitcoin or some
other virtual currency legally replaces the US
dollar under federal law, it will be taxed as property
or some other similar asset. What’s the difference between
legal tender and property? Under US law, property can be real, meaning buildings or land, or personal, meaning assets that you
own other than real estate. Personal property can be tangible, like your car or your
prized stamp collection, or it can be intangible, like the rights to a copyrighted image or a musical score. Cryptocurrencies would
qualify as intangible personal property under US tax policy. If my employer pays my
wages in virtual currencies, do I need to report
this income to the IRS? Yes, wages paid in virtual
currency denominations are taxable to the employee. Typically, an employer
must report the wages on a form W2, just like wage
payments in traditional money. Virtual currency wages are subject to federal income tax
withholding and payroll taxes. If I received cryptocurrency
for work I did as an independent contractor,
do I have to pay taxes? Just like virtual currency wages, payments to independent
contractors taking the form of Bitcoin or other
cryptocurrencies are subject to the same tax rules most of
us are already familiar with. Digital currency payments
to independent contractors are taxable as self-employment income. The person or business
who contracted the work must issue a form 1099 for any payments of $600 or more, and freelances
should report this income on a form 1099 MISC. Cryptocurrencies change
in value all of the time. How do I know what value
to report to the IRS? Virtual currency wages,
self-employment income, or other payments should be reported using the full fair market
value of the cryptocurrency at the time the payment was made. So, for example, if you
are paid one bitcoin when the price was $10,000, but the price increased
to $12,500 by the time you file your taxes, you report the income as $10,000. What if I buy and sell
cryptocurrencies for a profit rather than earn them through wages or self-employment income? If you invest in cryptocurrencies, it’s likely characterized as
a capital asset by the IRS. A capital asset is a
significant piece of property like real estate, vehicles, stocks, bonds, or valuable collectables
like art or antiques. Capital assets owned
for more than one year produce what is known as
a capital gain or loss. Capital gains are taxed
differently than earned wages or self-employment income, and the rates vary based
on your tax bracket. On the contrary, capital assets owned for less than one year produce
a short-term gain or loss. Short-term gains are taxed
at the ordinary income rate, which is determined by
your taxable income. These tax rates are changing
with the federal tax reform coming in 2018, so be sure
that you’re up to date on how the new laws
affect your investment. I usually prepare my
tax returns on my own. Should I consult a
professional if I’m expecting tax liability from
cryptocurrency investments? Many of us use software and apps to help us manage our finances. However, when it comes to the fast-paced and constantly changing world of cryptocurrency
investments, not consulting with a tax professional
when setting up or managing a virtual currency portfolio is a mistake. Your hometown accountant may
not be totally up to speed on the latest rules and regulations affecting cryptocurrencies. Fortunately for you, all Happy Tax CPAs have been specially trained
in the tax treatment of Bitcoin and other virtual currencies. As a result, you can count on Happy Tax to get you the tax planning
and preparation services you need to give you some
much needed peace of mind come tax season.

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