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How Is Cryptocurrency Taxed?

Cryptocurrency is gaining more widespread acceptance as an alternative form of payment and transfer of assets. The question that invariably arises is how will cryptocurrency be taxed?

The tax landscape is most likely subject to change, however, currently, there are two basic tax impacts of cryptocurrency. First, we should know how the IRS views cryptocurrency. Rather than as liquid cash, the IRS views cryptocurrency as property (illiquid). This view is similar to bonds, stocks, and other types of property held for investment.

Income. Are you receiving cryptocurrency payments in lieu of cash? This mostly applies to businesses but can also apply to individuals receiving cryptocurrency as income. The cash value of the cryptocurrency received is taxed as income. If you hold onto the cryptocurrency received as income, the amount you recognized as taxable income becomes your basis.

Capital Gain. The other tax impact is when holding cryptocurrency as an investment. This will affect most individuals buying cryptocurrency as well as any individuals or businesses which receive cryptocurrency as income and then hold onto it. When you purchase or hold cryptocurrency and then sell it, the gain is taxed as short-term or long-term capital gain, depending on the length of time it is held. This is very similar to other types of property held for investment.

Do know that the IRS is starting to make mandatory answering questions on the tax return as to whether or not you have a cryptocurrency account. Failing to answer this question truthfully can cause problems down the road. Like all other parts of your tax return, you sign it under penalties of perjury.

If you have a cryptocurrency account, be sure to disclose it when contacting our office.