Over the past year, cryptocurrencies like Bitcon and Ethereum have soared in popularity. Once an underground trend known only to a select few investors, cryptocurrency is now better known than ever. But as more people choose to invest in Bitcoin and other cryptocurrencies, they are encountering an issue that they probably hadn’t thought about: How to pay taxes on it.
Because virtual currency is still a murky topic for many people, its tax implications may seem confusing. Making a mistake when paying taxes on cryptocurrency could result in financial penalties. If you own shares in bitcoin or you are thinking of investing in cryptocurrency, it is important to know how it is taxed.
Cryptocurrency as capital asset
The Internal Revenue Service (IRS) released a guideline regarding cryptocurrency and taxes in 2014, when virtual currency was gaining momentum. According to the IRS, virtual currency is considered a capital asset. Any gains or losses are subject to capital gains law.
Investment vs. cash
There are slightly different implications for taxpayers who treat cryptocurrency as an investment and those who use it as cash. If you purchased your shares of bitcoin or other virtual currency as an investment for the future, you should know that calculating your gains or losses is similar to buying or selling stocks. If you spend your cryptocurrency directly on goods or services, then your gains or losses are a result of each individual transaction. Every time you purchase something, you will have to calculate your gain or loss.
Reporting your gains or losses
You will report your gains and losses in the same manner whether your cryptocurrency acts as an investment or cash. Record your gains or losses on a Schedule D form, and then transfer your results to your 1040’s reconciliation page. If you have no gains or losses but have merely held on to your virtual shares, then put your feet up and relax: You won’t have to report anything until you make a disposition.