Understanding the basics of your Crypto currency taxes

Understanding the basics of your Crypto currency taxes

Cryptography is used in different sectors today. It is the profession of the future. It is popular in block chaining, IoT and Artificial Intelligence, and is fast becoming a need for everyone.

Cryptocurrency inherits its features from cryptography. It is a means of exchange and channel to execute and adopt transactional data across the internet. Cryptocurrency is being adopted fast because of its decentralised feature. It uses blockchain technology and adopts transparency and rigidness.

What makes Cryptocurrency different?

The most important feature of cryptocurrency is that it is not controlled by any central authority. The decentralised nature of blockchain makes cryptocurrencies theoretically immune to the old ways of government control and interference.

Fundamental of Bitcoin

You surely have heard of bitcoin, the most popular cryptocurrency nowadays. So, what is bitcoin? Bitcoin is a digital cryptocurrency. There are many other cryptocurrencies.

Due to its decentralised nature, it doesn’t have one central reservoir or repository to transmit our cash flows. It works on its own. There is no interference by governments. Hence this improves transparency, and makes it hard to manipulate its worth.

Types of digital currencies

As mentioned, there are other types of cryptocurrencies out there besides bitcoin. Examples are Ethereum, Litecoin, Ripple, and many more are still coming to the market. For instance Facebook wants to introduce Libra.

Basic things you need to know about Cryptocurrency Taxes

Over the last couple of years, cryptocurrency has become eminent digital currency in the market. Things have started to get complicated. In the year 2014, the IRS issued guidance to individuals who pay hefty amounts of taxes. The guidance clearly defines that cryptocurrency which is a virtual digital currency will be treated as a capital asset, not a fixed one.

What is a capital asset?

An asset comprises tangible assets like property homes, cars, furniture, electronic equipment, check bonds, etc. In terms of those who are operating businesses, a capital asset is something which lasts longer than a year without being there for the purpose of being sold.

What is a fixed asset?

It is an asset comprising tangible things like property homes, cars, furniture, electronic equipment, check bonds, etc. But it contrasts with the capital asset in terms that it is very difficult to convert fixed assets into cash while the capital asset can be converted with ease.

  • For those taxpayers buying and selling cryptocurrency as an investment, calculating gains and losses are treated the same as buying and selling stock. That’s true, as well, when it comes to the basis, holding period and a triggering event.
  • For those treating cryptocurrency like cash – spending it directly for goods or services, or using it to buy other cryptocurrencies – the individual transactions may result in a gain or a loss.

Considering Bitcoin and other cryptocurrencies as traditional tax

The IRS guide in 2014 elaborates that cryptocurrencies be treated as a traditional tax. It means that Bitcoin alongside other cryptocurrencies can be used for property tax purposes, despite being considered as a currency.

This scenario leads us to the fact that being the owner of golds, stock shares, or real estate investment is the same as owning bitcoins. You are required to report your capital gains and losses from your cryptocurrency trades on your taxes. Failing to do so is considered tax fraud by the IRS.

What’s a taxable event?

A taxable event occurs when some sale of the asset occurs. For cryptocurrency, a taxable event sparks when a cryptocurrency like Bitcoin is traded with some cash. This means a transition from intangible to tangible assets, for both the purposes of either selling or buying goods or services.

There is another complicated thing that requires attention. The Internal Revenue Service doesn’t allow involvement of the third party. Virtual currency like Bitcoin cannot be traded with the help of third-party services. So the IRS has assigned a Form 1099-B which should be filed before making any contact with a third party.

Why did the IRS mention this instruction of not adopting third-party services?

Coinbase is a company that does this. It is a third-party exchanger for the virtual cryptocurrency. If you try to withdraw or deposit cryptocurrency using an exchange that means your data won’t be tracked any longer. In that way, it’s the same as taking money out of your bank. For that reason, cashing cryptocurrency out of an exchange or similar platform may be treated as a sale – even if you’re forced to withdraw it.

What is considered a non-taxable event?‍

  • Assisting or gifting anyone cryptocurrency doesn’t trigger a taxable event.
  • A transfer is not a taxable event (you can transfer crypto between exchanges or wallets without realising capital gains and losses).
  • Buying cryptocurrency with USD is not a taxable event (you don’t realise gains until you trade, use, or sell your crypto).

What if I lose money?

If your realised losses exceed your realised gains, you have a capital loss for tax purposes. You can claim up to USD 3,000 (or USD 1,500 if you are married and filing separately) of capital losses and the amount of your loss offsets your taxable income for the tax year.

If your losses exceed those limits, you can carry the loss forward to later years subject to certain limitations and restrictions.

Conclusion

We can conclude that with the rapid advancement in Cryptocurrency, and more industries adopting this splendid technology, we could see more taxation schemes being launched in the future by the Internal Revenue Service. Features like Bookkeeping Services for small business and further amendments could be done using the Cryptocurrency decentralised feature. This decreases the chance of losing data integrity, data confidentiality, and data authenticity.

Author: Moshek Africa

Moshek Africa is a digital media research and development web service. The website offers informative content for a large audience interested in varied information. With a lot of interest in Kenya and the East African region tech, business, travel spaces, and Africa at large. It also covers universal content of interest to the world.