What Are The Tax Implications of Trading Cryptocurrency, 5 Facts

The Tax Implications of Trading Cryptocurrency 

For taxpayers who are considered U.S. persons for tax purposes, the trading and selling of cryptocurrency can lead to a significant amount of tax headaches.  That is because the rules and regulations involving cryptocurrency are still in a state of flux and there is a large gray area when it comes to how to report certain transactions, whether certain transactions are taxable, and whether foreign cryptocurrency is reportable for U.S. tax purposes on forms such as the FBAR and Form 8938. Let’s take a quick look at five (5) important facts when it comes to the tax implications of trade and cryptocurrency.

Crypto Sales are Taxable Events

The first thing to keep in mind is that if you sell cryptocurrency it is taxable just as any other asset would be taxable. Remember, the United States does not treat cryptocurrency as currency but rather as property.

• • • Taking a very simple example, if Jane purchases cryptocurrency for $10,000 and sells for cryptocurrency for $25,000, she has a $15,000 taxable gain.

    • Depending on how long she held the asset will help determine whether it is short-term capital gain which is taxed at ordinary income tax rates or long-term capital gain which is taxed at preferred rates and varies based on the Taxpayer’s tax bracket.

Exchanging Crypto is Taxable

If a person exchanges cryptocurrency with another person, then this exchange is also taxable.

• • • For example, if taxpayer one has a cryptocurrency with a $10,000 basis and a $15,000 value and she exchanges cryptocurrency and receives cryptocurrency in return that has a $20,000 value, then she has engaged in a taxable event which is reportable on a U.S. tax return common schedule D, form 8949.

Buying Crypto is not a Taxable Event

When a person purchases cryptocurrency, that is not a taxable event. Instead, when a person purchases cryptocurrency what they are doing is establishing the basis in accordance with the value they paid for the cryptocurrency.

• • • For example, if Jeffrey purchases cryptocurrency for $10,000 and then later sells it for $50,000, the purchasing event of acquiring the cryptocurrency for $10,000 establishes the basis so that the gain would be $40,000 or the difference between the $50,000 sale price and the $10,000 acquisition price

If You are Paid in Crypto, It Gets Complicated

Sometimes, taxpayers will be paid in cryptocurrency for services rendered. Unfortunately, this can become very complicated because oftentimes when a person is paid in cryptocurrency, other taxes have to be paid as well such as social security contributions. In other words, just because the person is receiving their payment in cryptocurrency instead of traditional currency does not mean that other taxes that are otherwise associated with getting paid by check or cash are no longer applicable. Since the value of cryptocurrency fluctuates, overall it could become a very complicated scenario trying to determine what the withholding amount should be and when those payments should be made.

Foreign Crypto Reporting (FBAR, 8938, 8621)

With the globalization of the United States economy, it is becoming much more common for taxpayers to have accounts overseas perhaps this may also include cryptocurrency accounts as well. Depending on whether the accounts are exclusively cryptocurrency or a hybrid account that holds another type of foreign currencies as well will help determine whether there are international information reporting requirements and forms such as the FBAR, Form 8938, and Form 8621.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.