The rise of cryptocurrency has many people wondering how it can and will affect their tax filing. Let’s go through some of the ways crypto investments could show up next year on your tax forms. Virtual Currency and Cryptocurrency Since 2014, the IRS has treated virtual currency as property, for Federal income tax purposes. According to the IRS Notice 2014-21, virtual currency “is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” Virtual currency can be used to pay for goods or services, or it can be held for investment purposes. Similarly, cryptocurrency is a type of virtual currency that “uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.” Right now, Bitcoin and Ethereum are some of the most popular cryptocurrencies, but there are thousands of different ones moving through markets across the globe. Cryptocurrency’s boon in popularity can be attributed in part to its safety – each transaction is specially encrypted and recorded on a digital ledger (blockchain) that is reviewed and approved by every member in the network. Basic Cryptocurrency Tax Liability As for your cryptocurrency tax liability, the classification of crypto as property means you may have to pay taxes on your holdings. And because of the rise in popularity in cryptocurrency transactions, the IRS will be looking to enforce the reporting of these assets more and more in the coming years. IT’S also important to remember that the different transactions you enter into with cryptocurrency – buying selling, swapping, mining, and more – may be treated differently by the IRS and on your tax returns. Let’s take a look at some of the ways cryptocurrency tax liability is handled by the IRS. Crypto Transactions and Their Tax Implications: Buying, Selling, & Swapping Every trader’s cryptocurrency tax situation is a bit different, but most of these …
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