The IRS has recently announced their position for the tax rules that will cover the cryptocurrency markets. This is covered in their recently published report that looks at and describes in detail, the tax implications that you need to consider when you use cryptocurrency.
The IRS is treating the cryptocurrency similar to how they currently treat property in relation to the federal tax due. The name of the report is ‘Virtual currency is treated as property for US Federal tax purposes’, the full report is possible to view here.
The US tax rules
The report acknowledges the fact that many people use the currency for the payment for goods and services, but as these currencies are not classed as legal tender in the US, there are certain tax restrictions and implications that will apply.
As a means for tax purposes the cryptocurrencies are treated in the same manner as the Federal Reserve taxes property. What is important to understand, are the implications that come with using the currencies to pay for goods and services. The currency isn’t a legal tender and this can cause issues with any losses that you might be subjected too, but is looked upon differently when it comes to money made.
If you are in receipt of currencies for payment of goods and services then you must inform the IRS with the amount received, converted into US dollars and the date and reason for the acceptance of these. There is a possibility that you will be required to pay for taxes due on this income that you receive. It is up to the IRS to decide if taxes are then due on the money in question.
Tax implications can cost you
If you have not considered the tax implication that could be the result of a transaction then this could have a negative impact on the amount of money that you will have, you might be subjected to a tax bill that you are not expecting. This can have a negative impact on your financial situation, it is therefore a great idea that if you are dealing in the cryptocurrency markets that you consider the tax implication for the country that you are currently residing in.
If you are aware that you country of residence hasn’t put into place a definitive plan for collecting the taxes that could be due, then it is a great idea to make some provision for the possibility of a tax bill. This will enable you to not need to find vast sums of money, if a tax recommendation is then made on the cryptocurrency market profits.
Remember that mining currency is a way to generate income and could be subjected to the same implications regarding tax as being self employed, or employed if you are working for another individual. This will mean that you will be liable to tax on the money that you are making in the mining process. Being aware of the tax implications will allow you to budget accordingly, and not hit with a heavy fine or a large tax bill for which you haven’t budgeted accordingly.
If you are paid by your employer in cryptocurrency then you are still liable for the same taxes to be paid from your income, regardless of how you are paid. This is important to know even if you are an employee, it could save you owing money in taxes that should have been paid and haven’t. Unfortunately the money will need to be found from you and not your employer so knowing the rules and regulations surrounding your pay and the taxes you will be paying is vital.
Understanding the rules and regulations surrounding cryptocurrency is not going to be easy. You might require help to make sure you are paying the right amount to the IRS. Checking with an accountant is going to give you some assurances that you have understood the new regulations, but there are going to be some instances where information could be conflicting; it is better to be safe and reassured that you have completed the correct paperwork that is required for your federal tax return.
As always with any tax laws, it is up to the individual to make sure that the correct paperwork is filed and any tax due is then paid. Failure to declare this income could result in the person being fined as well as being prosecuted for not completing the required paperwork. The excuse of ignorance is not accepted with the filing of tax claims and will not reduce the implication of prosecution, if this action is taken.