The Wild West days are over for cryptocurrencies. In the past year, we have seen how unregulated cryptocurrencies were. In one way or another, this has been the main appeal of cryptocurrencies to investors within the crypto space. People are flocking towards investments such as cryptocurrencies because it has a decentralized structure which enables them to be free of any central institution such as the bank and the government. However, those days will soon be over because the IRS is stepping up their enforcement.
As governments have left the consumers in the dark when it comes to taxation, this has made a lot of cryptocurrency investors wonder what they should do about taxes. In fact, many have enquired from the IRS about cryptocurrency taxation as the agency hasn’t clarified what cryptocurrency traders should do. Organisations are also approaching the agency to define its policy on cryptocurrencies. Understandably, many are concerned as different governments around the world are regulating cryptocurrencies in different manners. Most recently, South Korea has made it mandatory for cryptocurrency investors to trade on a real name basis.
In fact, there are already private services that help people to file their tax returns on cryptocurrencies. Many are also realizing that the unregulated days of cryptocurrency is quickly coming to an end. The IRS is not ignorant of what is happening in the cryptocurrency space. They are aware that a lot of people are making big money with cryptocurrencies.
Back in 2014, the Internal Revenue Service did issue guidance on how virtual currencies will be taxed. However, cryptocurrencies were not classified as a currency. Therefore, cryptocurrencies could not be subject to the taxation guidance that was released. Although people call these cryptocurrencies as currency, the government does not acknowledge these cryptocurrencies as a currency because it has not been issued by the centralized body.
The government is stepping up
Chainanalysis is a cryptocurrency software company which is working closely with the government to track the movement of money through the Bitcoin economy. In fact, this is a service provider that a lot of governments want to work with. This is because the government wants to track people are trying to evade the taxes. The layer of complexity with the cryptocurrency world has made it much more difficult because of the decentralized feature.
Back in 2016, the agency asked Coinbase which is one of the most popular cryptocurrency exchanges to provide them with information about the United States taxpayers. Due to the subpoena, Coinbase had no other choice but to comply.
No running away from taxes
People realize that the government is not blind about the cryptocurrency industry. On top of that, the government wants to collect taxes as soon as possible. Since 2014, the government agency has not issued more guidance. However, many are anticipating the release of guidance which is updated to reflect the current situation in the cryptocurrency space. Clear definitions of taxation methods are necessary as this relatively new industry.
People are concerned with the method that Bitcoin is taxed. Here are some of the measures you can take to stay away of any tax problems ahead of you as the IRS will come out with another guide that will make it compulsory for cryptocurrency investors to file their taxes.
- Keep detailed records
For one, it is important to see that the IRS classified virtual currencies as property. Therefore, all the profits and losses will be subject to capital gains tax. Whenever an investor makes a purchase, this taxes will apply to cryptocurrency. In short, every single transaction that cryptocurrency users make are subject to taxes. However, this is causing a commotion because it places a huge burden on the taxpayers.
There may be thousands of transactions that cryptocurrency investors did not track. On top of that, it is almost impossible to recall these transactions. 2017 has been a busy year for cryptocurrency and foreign day traders in cryptocurrency which makes this task much more difficult. Although it’s difficult to remember the transactions previously, you can take the step of keeping a proof of all the transactions that you have engaged in starting today.
On top of that, if exchanges go out of business, you can easily refer back to your notes. Also, if you lose any of your records, it is your responsibility to reconstruct those records as best as you can.
- Calculate your gains and losses
Now that you have constructed all the transactions that you made, the challenge is to find the gains and losses that you made with every one of them. For those of you that traded cryptocurrencies after holding it for less than a year, it is considered as a short-term gain. Meanwhile, cryptocurrencies that you traded after you held it for more than a year is a long-term gain. Therefore, if you are a long-term trader, you will pay a lot fewer taxes than others that trade in the short term. This is done to reduce the level of speculation within the space.
To help regulate the gains and losses, investors are advised to use software services. Hence, you can export the calculations that you made using the software as a report and use it to file your taxes. There is no current prescribed method for you to pay your taxes. You can utilize the first in first out method as it is the most common way people use.
- Find an accountant who has experience with cryptocurrency
The problem with the infancy of the industries that there are not many accountants who are qualified to give you advice when it comes to cryptocurrencies. However, as the industry has grown significantly in the past year, there are going to be some qualified professionals out there can help you with taxation.
- Stay alert for new information
There are still a lot of people who are unclear about what is going on in the cryptocurrency taxation world. Therefore, you need to keep a close eye on the development of the cryptocurrency taxation space within your country. Although the IRS hasn’t released any specific details about it, they are working on a solution in this area it as they do want to collect taxes from cryptocurrency investors. It will surely happen. It’s just the matter of time.