October 15, 2020 | AtoZ Markets – Virtual currency is a digital format of value that you can use as a medium of exchange. You can also use it as a unit of account or a store of value. Some environments allow users to use it like the real currency.
However, according to the IRS, virtual currency does not have legal tender status in any jurisdiction. The virtual currencies are gradually making inroads into online transactions. Whether you are buying goods online or playing Bitcoin Baccarat on your favorite online casino, you’ll soon have an option to pay using cryptocurrencies.
Virtual currencies tax guide for 2020
Read on this guide to find out some of the things you must know concerning virtual currencies. At the end of it, you’ll be better equipped to answer some of the frequently asked questions on crypto taxation. Therefore, if you are a gambler on online casinos, you’ll find this guide profitable as many casinos are moving towards virtual currencies.
The IRS view of Cryptocurrencies
As the use of cryptocurrencies continues to be widespread, the IRS has worked on how to classify it and come up with tax guidelines. In 2014, they declared that all Cryptocurrencies should be classified as property. As a result, they require owners of Cryptocurrencies to follow tax reporting guidelines used in real estate.
In their classification, the IRS stated that if you hold Cryptocurrencies for less than a year, you should consider any profits you gain from them to be taxed as regular income. But, if you keep them for longer, you should consider them as capital gains or losses and report them accordingly. In 2019, the IRS became stricter in following up tax returns from virtual currencies. Investors that were underreporting their crypto transactions received more specific warnings from the IRS through emails.
Hard Forks and Airdrops
To demonstrate their seriousness on the crypto tax issue, they came up with the Revenue Ruling 2019-24 that gave directions on matters of Hard Forks and Airdrops.
Hard forks occur when changes to a blockchain lead to a split in which the old chain continues, and a new chain is created. Airdrops are when you give new coins or tokens to the address of another chain.
In the guidelines, the IRS stated that Hard Forks without airdropped coins or tokens are not taxable events because you’ll not have gotten any gross income. But, hard forks with airdrops of the new chain results in gross revenue, meaning there is an attainment of wealth because a tradable good that has value was created. In such cases, you’ll use the fair market value at the time of the airdrop as the basis.
Here are other tips from the ruling:
The virtual currency used to pay for goods and services is taxed as income.
For instance, if you pay your employees using virtual currency like Bitcoin, you must report your employee earnings to the IRS using the W-2 forms. While reporting, you’ll convert the Bitcoin value to US dollars. Use the Bitcoin exchange value on the date when you made the payments and keep the records.
The wages you pay in virtual currency are subjected to withholding to the same level as the dollar. For employees, you must also report your wages in dollars, even if you were paid in dollars. If you are self-employed and you have Bitcoin profits or losses from your transactions, you must convert the virtual currency to dollars using the rates of the day you received them. Report the converted figures on your tax returns.
If you are holding virtual currency as capital assets, they’ll be taxed as property.
If you are holding virtual currencies as a capital asset, you’ll treat them as property for tax purposes. Your virtual assets will be subject to general tax principles applied in property transactions. Any profits or losses made from the sale or exchange of the virtual assets will be taxed as capital gain or loss.
If you are a Bitcoin miner, you’ll report the receipt of virtual currency as income.
Suppose you mine Bitcoin successfully and get earnings from the activity. In that case, you must include it in your gross income after determining the fair dollar market fair value of the virtual currency on the day you received it.
Things to consider when planning to pay taxes from Cryptocurrencies
The IRS treats the day you after you acquire an asset as the first day. Therefore, the tax consequences of holding crypto for 365 days and 364 days are significant. The date you acquire the investment in the following year marks the distinction between long-term and short-term as per the agency. It is critical to be conscious of your dates as you record your holdings and prepare taxes.
Similar to other properties or investments, Cryptocurrencies’ value may go up or down. The IRS understands that and can write off your losses on Cryptocurrencies but with a limit of 3,000 USD.
Stay up to date with IRS virtual currency tax guidelines
The IRS is continually updating its virtual currency documentation. Therefore, it would be best to keep checking the documentation for any updates. This will help you stay up-to-date with what is happening in the agency on virtual currency matters.
Learn from the experts
It is usually in your best interest to consult an expert. Virtual currency regulations and tax situations are somewhat hazy; therefore, you might require an expert’s input from time to time. Whenever there is an issue you’re not sure about, don’t guess; consult an expert even if it costs you dearly.
Virtual currencies are gaining favor with investors again. As a result, the IRS has decided to take them more seriously. If you are a freelancer, an investor, or own a business, you should take them seriously too. Furthermore, it would help if you made it a practice of visiting the IRS website frequently to update yourself on the regulations touching on virtual currencies. The bottom line is more businesses are embracing the use of Cryptocurrencies, and in the near future, the levels of use will soar to unprecedented heights.