Bitcoin is subject to taxation, regardless of price fluctuations

In recent weeks, bitcoin investors have watched as this cryptocurrency has shed a substantial amount of its value. This isn't uncommon. All currencies tend to fluctuate in value when compared with other currencies. Even the United States dollar can go into periods of increased or decreased international value. Those who own substantial amounts of bitcoin can likely look forward to it regaining some, if not all, of the recently lost value in upcoming weeks.

In the early days of bitcoin trading, some people were looking at this digital currency as a means of hiding assets from the government. These days, however, bitcoin is very mainstream. You can even use it to pay at some restaurants. The Internal Revenue Service (IRS) is very aware of the fact that many people have tied up substantial financial assets in Bitcoin, and they expect that United States taxpayers will report and pay taxes on their bitcoin assets.

Bitcoin is taxed as a possession, not currency

When you report your assets to the IRS, you will need to report whatever amount of bitcoin you currently own. The IRS has chosen, for a number of reasons, to treat bitcoin like a possession and not a currency. You will have to report and pay taxes based on the fair market value of the bitcoin you currently own.

For those who bought bitcoin early and have held onto it for years, the profit margin on this digital currency is massive. Early bitcoins were purchased for low prices, often under a dollar. Those bitcoins are now worth substantially more. You are not allowed to report what you paid, but what they are currently worth.

A handful of bitcoins, purchased in 2011 for $0.30 each are today worth over $3,500 apiece. You will need to verify the current market value of your owned bitcoin to ensure accurate asset reporting come tax time.

Failing to pay taxes on your bitcoin could cost you big time

You may think that because bitcoin is a cryptocurrency without your name on an account that no one will discover you own it. However, the IRS is well aware of the fact that many people have begun using bitcoin as both an investment and a secure means to transfer funds online and in physical businesses. Although the discovery process may be more complex, you can absolutely get caught and face penalties for failing to report and pay taxes on your bitcoin.

When you consider the expense of fines, fees and criminal penalties, the risk associated with refusing to report your bitcoin ownership far outweighs the potential reduction in tax liability. Complying with current tax law is complicated, but doing so is in your best interest.

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