Internal Revenue Service (IRS) of U.S states on its website that virtual currencies are treated as “property” for U.S federal tax purposes. The common tax principles of property apply to virtual currency transactions as well. Wages or salaries paid in any virtual currency is taxable in the employers’ hands and is to be reported on Form W-2.
For most investors, waiting till April 17, 2018, to the tax filing deadline seems to be the safe option. As per the popular tax and credit score website, Credit Karma, only 100 of the 250,000 online filers with it have reported cryptocurrency investments. General Manager of the platform, Jagjit Chawla, reassured users that filing or cryptocurrency is not as hard as it seems and that Credit Karma was fully equipped to handle all kinds of queries and could extend all the support.
In 2015 as well, the IRS had declared that only 802 individuals had reported investments from cryptocurrencies in their filings. As per Head of Research at Fundstrat Global Advisors, Tom Lee, U.S households should be having at least $25 billion of capital gains in cryptocurrencies where the market capitalization has crossed $500 billion and we know how much percentage of cryptocurrency trade happens through the U.S.
The fact that these investors are willing to wait out before the IRS comes knocking, shows the high-risk appetite that these investors have.
A lot of people do not understand the term of “taxable events” – when you actually sell the cryptocurrency to use it for another currency or use it to purchase something. Selling at a profit requires you to pay a capital gain tax. Holding the cryptocurrency for less than a year requires you to pay a short-term capital gains tax as part of your ordinary income. If the holding period has been more than a year, then the gains will be taxed at one of the long-term capital gains tax rates – 0%, 15%, or 20% depending upon the income slab. A loss should also be reported in the tax filing to receive a set-off in the taxable income. These things have to be reported under Section D in Form 8949.
If you are getting paid via cryptocurrencies, ensure to get a Form 1099 from your employer. The rules for independent contractors and self-employment tax rules apply. A payment made via a virtual currency has to be reported like any other property.