Did you invest in bitcoin in 2017, going along with the cryptocurrency craze that took over the country? You might be involved in some complex tax situation- regardless of how you got it or made use of it.
You can become a victim of IRS rules on bitcoin in unexpected ways.
In 2014, the IRS realized that cryptocurrency is treated like property, not a currency. This might seem like an insignificant difference but it’s the foundation for when the IRS determines whether an individual has tax debts. And such tax penalties move around what the government agency referred to as “realization event.”
As realization event in relation to bitcoin revolves around three actions: getting bitcoin through mining, exchanging bitcoin for dollar or euros and using bitcoin to purchase goods or services.
In any of these instances, the bitcoin owner is liable to tax.
However, selling property is not generally linked with a taxable gain, with the exception of housing or fine art.
“Many people think that there are no tax consequences when they sell an object — it’s for personal use and they’re expecting to lose money on it anyway, whether it be a car, an appliance or another piece of property,” explains Brian R. Harris, a tax attorney at law firm Akerman LLP in Tampa, Florida. “Many people aren’t in the mindset of holding tangible objects for investment and then recognizing gains when they ultimately sell them.”
“But if there’s been a gain from the bitcoin owner’s cost basis, there’s a tax liability,” he says.
It is important to note that the issue of cost bass can be a huge situation. Similar to bonds or stocks, the cost basis is the price at which you obtained the asset. Therefore, bitcoin owners need to be aware of not only the price when they know the value but also the acquisition price for their cryptocurrency. But this information is not always available – so many people do not know that they have to pay taxes.
“It’s a potential way to run afoul of IRS laws,” Harris says. “You’re conditioned with the receipt of 1099 to know that you have a taxable event and what that taxable gain is. You don’t always get that with bitcoin. So many people just aren’t being informed from the exchange in a manner that they’re used to.”
Regardless if you go above these thresholds or not, you are still liable to pay tax and even though not paying taxes on your gains can be an honest mistake, the IRS will surely not be sympathetic with you.