Cryptocurrency investors could face problems with the IRS
This article looks at the tax obligations that cryptocurrency investors now face with the new tax law.
Cryptocurrencies are often seen as the ‘Wild West’ of investing, thanks to their extreme volatility and lack of government regulation, and for a long time cryptocurrency investors have managed to skirt paying taxes on their investments. However, recent court decisions along with the recently passed Tax Cuts and Jobs Act mean that anybody who invests in cryptocurrencies will have to start declaring those investments to the IRS. Below is a look at how the IRS will start taxing cryptocurrencies and what the penalties for not reporting cryptocurrency transactions could be.
Subject to capital gains tax
Cryptocurrency investors were previously able to avoid paying capital gains taxes on their cryptocurrencies through a tax loophole called the like-kind exchange. The recent Tax Cuts and Jobs Act signed into law by President Trump, however, has closed this loophole. As a result, anybody who has made money from selling their cryptocurrency will have to pay capital gains tax on the income.
Capital gains taxes can range from 0 to 37 percent depending on how long the investment was held for and what the gain from that investment was. However, as the Motley Fool reports, cryptocurrency investors are unlikely to be provided with the 1099 Form from their cryptocurrency exchange that they will need in order to declare income from their cryptocurrency. Instead, the onus is entirely on the investor to keep records of their investment.
Other ways cryptocurrency is taxed
The capital gains tax may also apply when a cryptocurrency is used to pay for a good or service. That’s because the IRS considers paying for a good or service with cryptocurrencies to be a way of disposing of the asset. If the value of the cryptocurrency has increased from the time when it was first purchased, then capital gains taxes will have to be paid on the difference.
Additionally, those who mine cryptocurrencies will also have to declare their “block rewards” as income. Block rewards can be claimed as either self-employment or secondary income.
While disclosing income from cryptocurrencies is not always easy or straightforward, the penalties for falling to do so can be severe. As CNBC notes, those who fail to properly report their cryptocurrency transactions could face fines of up to $250,000 and even time in prison.
Help with tax problems
Being subjected to an audit or owing money to the IRS is a stressful and unwelcome ordeal. However, taxpayers have rights when dealing with the IRS. Anybody who is being audited or is involved in a tax-related controversy should contact a tax attorney as soon as possible. An experienced attorney can represent clients when dealing with the IRS and can help resolve any tax-related issues they may have quickly and effectively.