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Tampa Estate Planning Attorney > Blog > Tax Law > Tax Laws Apply to Cryptocurrency

Tax Laws Apply to Cryptocurrency


Cryptocurrency, which once was just Bitcoin, and now is seemingly a slew of online virtual currencies, is becoming more and more a part of our world. The news seems obsessed with reporting on it as an investment, particularly the swings in value that are more dramatic than any traditional stock or investment.

Whether you believe in cryptocurrency or not as a wise investment, there are things you should know about how the IRS treats it if you have or are thinking about investing.

IRS is Cracking Down

Because of the gains in value of cryptocurrency, which have led to some people making healthy profits, the IRS has a keen interest in the subject. The IRS is concerned that people making gains may not be reporting their income correctly. This is especially because most of these investments are short-term, making them subject to ordinary income taxes.

The IRS even recently issued a summons to one of the largest online cryptocurrency trade markets, Coinbase. The IRS wants records of currency transactions to match them up against tax returns to see who is getting away with profits without paying them.

How Cryptocurrency is Treated

Virtual currency is treated as property, not money. However, property that gains in value is subject to capital gains taxes. Income tax rates apply unless the currency/property is held for more than a year, when long-term investment rates apply, which are more favorable. For some lower-income taxpayers, the long-term rate may be 0%. Short-term rates can be as high as 37%.

Getting the better long-term rate just means holding the currency for more than a year, even one day longer. That seems like a good tradeoff, except for the volatile nature of cryptocurrency, where value can tank or spike in the period of a few hours.

For last year, taxpayers can use like exchange exceptions, which mean that if you sold property to buy the same kind of property (i.e., you sold Bitcoin to purchase a different kind of cryptocurrency), any gains in value aren’t taxed. The bad news is that exception ended for cryptocurrency in December 2017.

The good news is that if you lose your shirt on an investment, you can count those losses for tax purposes as well. The losses will usually offset gains. Where things get complicated is where traders buy and sell multiple cryptocurrencies, taking gains on some and losses on others.

Cryptocurrency Presents Unique Problems in Tax Laws

Making things even weirder, cryptocurrency is used like money to buy things, but the IRS considers it property. That means if you “pay” for something with Bitcoin, the IRS sees it as you disposing of property, not using money. Investors may find themselves subject to capital gains taxes that apply when someone realizes an increase in value on property.

Exchanges like Coinbase don’t have to issue 1099s, again because cryptocurrency isn’t considered money. This means taxpayers may have to guess at values when reporting cryptocurrency.

Make sure you’re getting every tax advantage that you can. Contact Tampa estate and tax attorney David Toback to discuss your tax issues or problems.




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