What Taxpayers Should Understand About Bitcoin And Cryptocurrency

A cryptocurrency is a digital form of money, designed for security and anonymity. Bitcoin is just one type of cryptocurrency. As more people get involved, it is becoming a trendy method to make money.

The sale of cryptocurrency skyrocketed in 2017 and 2018, and the IRS is not going to turn a blind eye from those profits. If you or your business profited by selling Bitcoin or other cryptocurrencies, then you must declare them on your taxes. Include the value of the cryptocurrency on the date you received it. If the cryptocurrency you sold or used was worth more than what you bought it for, then you likely owe taxes on it. Contact the experienced tax law attorneys at Kundra & Associates can help you appropriately declare cryptocurrency on your taxes.

Exchanging Cryptocurrencies Will Not Help You Dodge Tax Obligations

Cryptocurrency is seen as property by the IRS, meaning it is taxed at the same rate as property transactions. Some cryptocurrency holders utilized a tax exemption to escape tax obligations on their property. Previously, people could exchange one digital currency, such as Bitcoin, for another, such as Litecoin, to diversify their portfolio without paying extra for the gain.

Section 1031(a)(1) of a recently amended tax law, updated the definition of property eligible for exemption. It now only includes "real property," meaning it applies only to real estate transactions. Now, if you trade your Bitcoin for Zcash, you will need to pay for it. The IRS may trigger an audit if they notice an attempt to dodge cryptocurrency tax obligations.

What Is Cryptocurrency Mining?

Digital currency mining refers to using a computer program to validate specific types of cryptocurrency transactions and maintain the transaction ledger. A public ledger, called blockchain, tracks every transaction carried out by most types of cryptocurrencies. Each transaction is verified by cryptocurrency miners. Miners also release new currency.

Miners use programs to complete complicated "blocks" in blockchain. These miners are paid for their work in Bitcoin. Now, with the evolving popularity of cryptocurrency, more people are mining to make significant sums of money.

How Does The IRS Tax Mined Cryptocurrency?

The IRS taxes cryptocurrency earned by mining. When a taxpayer mines a digital currency, they must include the value of the cryptocurrency in their gross income. Since cryptocurrency values can spike and fall, always record the value of the currency on the date you received or and sold it. Essentially you should track the gain or loss made when you sold the currency.

Some people mine cryptocurrency as a side-job for extra cash. If you are mining cryptocurrency in your free time, then the net earnings resulting from those trade or business activities may be subject to self-employment tax. However, mining done in your free time may tiptoe the line between business or hobby, and may be subject to varying deductions.

As cryptocurrency grows in popularity, some miners may be classified as independent contractors. Cryptocurrecny you received as an independent contractor likely constitutes as self-employment income, and is subject to self-employment tax. It is best to discuss how to classify your mining income with our tax lawyers.

The Future Of Bitcoin Mining

An issue that remains with Bitcoin mining, is that a majority of Bitcoins have already been mined. Less than 20 percent of Bitcoin remain to be mined until the supply cap is reached. As the cap becomes nearer, Bitcoin may become more scarce, potentially making it more valuable. An unfortunate side effect for miners is that they receive less Bitcoin for their work as time goes on.

If you purchased, sold or exchanged cryptocurrency, then contact our Maryland tax law firm. We assist clients in all nation and international tax issues. Email, or call us at 301-637-8130.