The world around us has changed the way we invest and pay for goods and services. Consumers went from bartering with goods to paying with cash, then to debit/credit cards and now more heavily towards cryptocurrency. Investors, who in the past looked towards stocks, bonds, and mutual funds as ways to generating a return have also gravitated towards the likes of Bitcoin and other crypto-coins. In this article I will be discussing the taxability of cryptocurrency.
Taxability of Cryptocurrency – Overview
Along with these changes previously mentioned come important questions regarding taxes and accounting. When it comes to cryptocurrency, it really depends on the character of the transaction.
If you were selling goods or services, the transaction will likely bring on ordinary income tax. If the currency was an investment, long-term and short-term capital gains taxes will likely prevail depending on the term of the transaction. With just a little help from your local accountant, cryptocurrency taxation can become easy!
Now before we get started, it is important to speak to your individual investment advisor to determine if these currencies are appropriate for your future goals and your risk tolerance. If you are interested to learn more about bitcoin and how to purchase it, AskTraders curated a guide on how to buy bitcoin on eToro, one of the largest trading platforms in the market today.
Receiving Cryptocurrency for Services
The first reason a taxpayer might receive Bitcoin or another cryptocurrency is in the normal course of a trade or business. If you provide a good or service to your client or customer, you will likely be subject to ordinary income tax based on the fair market value of the coin when received. This would be your ordinary business income. You would also be subject to ordinary income tax on any gains in the currency when sold or used for other goods or services.
Keep in mind that you are still subject to the same backup withholding and 1099 contractor reporting requirements if using or receiving cryptocurrency. It is important to keep this in mind because the fines and penalties will be the same as cash transactions when levied. Along with using this type of currency for business purposes, it has become a very popular investment vehicle.
Using Cryptocurrency as an Investment
Many investors have shifted their focus from traditional stocks and bonds to cryptocurrencies. Please keep in mind that this is not a recommendation to invest in these potentially volatile currencies – they are not meant for everyone.
As with all investments, the purchase and sale of cryptocurrencies are subject to capital gains taxes. If you hold the currency for one year or less, they will be subject to your ordinary income tax rates (short-term capital gains). If you hold the currency for longer than one year, you will be subject to the lower capital gains rates. Either way (at the time of publication), you could be subject to the additional net investment income tax depending on your level of income.
Taxability of Cryptocurrency – Summary
All in all, the taxability of cryptocurrency takes on the characteristics of the underlying transaction. If you sold goods and services in exchange for the cryptocurrency (and showed any gains on this transaction) you will likely be paying ordinary income taxes.
However, if you are trading the currency as an investment, you will be subject to long-term or short-term capital gains taxes.
If you have any questions regarding these transactions, please speak to your CPA. For more articles about cryptocurrency or bitcoin, check out this section of our site!