Did you know that 16% of Americans are investing in cryptocurrencies?
For a good reason, virtual currency has made headlines over the last few years. Virtual currencies like Bitcoin are slowly gaining mainstream acceptance as a means of exchange. While the virtual currency industry is booming, it is still unregulated.
Do you want to understand how to handle virtual currency transactions? More and more companies are starting to accept virtual currencies as online payments. Read and learn more.
Virtual Currency Transactions: Introduction
Virtual currency is a property for U.S. federal tax purposes. It means that gains or losses from virtual currency transactions are subject to capital gains tax. In recent years, the IRS has issued guidance on the tax treatment of virtual currency transactions.
If you are engaged in a virtual currency transaction, you should consult with a tax advisor to determine whether or not the transaction is reportable to the IRS.
What Is Considered a Virtual Currency Transaction?
Cryptocurrency is considered property, and all property transactions are to be taxable events. Any transaction involving virtual currency is reportable to the IRS. Whether you are selling virtual currency for cash, using it to purchase goods or services, or exchanging it for another type of virtual currency, you will need to report the transaction on your taxes.
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Is It Considered Taxable Income?
Virtual currencies, also known as digital or cryptocurrencies, have increased in popularity and use in recent years. While the IRS has not issued specific guidance on the tax treatment of virtual currencies, they have indicated that virtual currency transactions are income.
You will need to report the transaction on your tax return if you receive virtual currency as payment for goods or services or sell virtual currency.
How to Report to the IRS
Even if you don’t receive anything in return for your virtual currency, you may still have to pay taxes on the fair market value of the virtual currency. It is because the IRS views virtual currencies as property, not currency.
When you dispose of virtual currency, you need to calculate your gain or loss just as you would for any other property type.
Penalties for Not Reporting to the IRS
If you use a virtual currency for personal transactions, you are only required to report the transaction if it is considered a capital gain or loss. If the transaction is for personal use, you are not required to report it.
Although the IRS has not released clear guidance on reporting virtual currency transactions, they will likely report them as a taxable income. It is best to say any transactions on your taxes to be safe.
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