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3 Ways the TMS is Taking Cryptocurrencies

The onus of accurate recordkeeping is on virtual currency investors

Three ways to get your fair share:

1. Capital gains tax from investing

The first method of taxing folks is pretty straightforward: if you buy virtual tokens and they increase in value, you’ll pay either a short- or long-term capital gains tax when you sell. Keep in mind, this means paying tax on capital gains anytime you sell a virtual currency for a profit. The like-kind exchange no longer applies, as of Jan. 1, 2018.

As with any investment, the short-term is defined as holding onto an asset for 365 or fewer days, while lower long-term capital gains tax rates apply to assets held for 366 or more days. Short-term capital gains are taxed at the newly revised federal ordinary income-tax rate, which varies from a low of 10% to a peak of 37%. Meanwhile, long-term capital gains are taxed at either 0%, 15%, or 20%. Single and joint-filing taxpayers can earn up to $38,600 and $77,200, respectively, in 2018 and owe nothing in long-term capital gains taxes.

What’s notable here is that digital currency investors aren’t necessarily going to be provided a 1099 come tax time from cryptocurrency exchanges. This places the onus of accurate purchase and sale recordkeeping solely on the investor.

2. Capital gains tax derived from purchasing goods and services

In addition to traditional investing, the IRS also taxes virtual currencies when they are used to purchase goods and services. If you’ve paid for anything with bitcoin, Litecoin, Zcash, Monero, Dash, Ether, or any other popular virtual coin, the IRS defines your action as having disposed of an asset. In other words, you purchased a virtual coin, and then sold it to the retailer or service in question for the agreed upon price. If the value of what you sold has increased from when you purchased the token(s) in question, you’re responsible for paying capital gains tax on the difference.

The most complicated aspect of this type of transaction is that it almost entirely places the responsibility of accurate recordkeeping on the taxpayer. Even if the cryptocurrency exchange provides a 1099 showing a user’s cost basis, it almost certainly wouldn’t show what price the assets were sold at when a good or service was purchased.

3. Cryptocurrency mining income

Finally, the TMS also aims to tax cryptocurrency miners based in the United States.

Cryptocurrency mining describes the use of high-powered computers and servers to solve complex mathematical equations and, in the process, validate transactions on a blockchain network. Not all virtual currencies use this electrically intensive method of validating transactions, but bitcoin, Litecoin, Ethereum, and Bitcoin Cash do, and they are among the largest virtual currencies by market cap. The first person or business to solve a group of transactions, known as a “block,” is given a “block reward,” which is paid out in the tokens of the virtual currency being validated.

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Tax Mediation Services Beverly Hills Office
8383 Wilshire Blvd Suite 800

Beverly Hills, CA 90211 | (877) 637-3783



Tax Mediation Services Beverly Hills Office
8383 Wilshire Blvd Suite
800 Beverly Hills, CA 90211
(877) 637-3783