Know why people prefer bitcoins to any other cryptocurrencies
02.07.2022
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Cryptocurrency is a general name for all digital currencies that use cryptography and operate on…
US Internal Revenue Service (IRS), a model for Cryptocurrency Taxation
Cryptocurrency emergence has been taunted by proponents as futuristic and a possible cause of change in how the financial systems operate. On the other hand, skeptics view it as an avenue for fraudsters and something that must be shunned. Whichever side you choose to identify with, the reality is that cryptocurrency in their various forms are already here with us. As new cryptocurrencies get mined and existing ones enter new markets like bitcoin in El Salvador and Central African Republic, the issue of taxing them become urgent.
WARNING: Investing in crypto, or other markets, can be of a high risk for your savings. Do not invest money you cannot afford to lose, because there is a risk for losing all of your money when investing in crypto, stocks, CFDs or other investments options. For example 77% of retail CFD accounts lose money.
Anybody who has even the slightest information about how governments raise the revenue to fund the always large budgets know that taxation it is. For your information, governments world over have the largest expenditure given their size, projects and programs. To keep governments operational, the tax authorities must be able to monitor flow of finances and ensure that correct declarations are made and taxes paid.
In emerging economies that look forward to embracing cryptocurrencies grapple with the major challenge of creating reliable and responsive taxation regime for them. Remember, cryptocurrencies are by nature not controlled by any fiat agency. So, to reliably tax the virtual currencies requires an elaborate process which is lacking in most countries. It can take forever scratching of heads to really develop such systems in African countries for example.
You can read more on Taxing Cryptocurrency, the troubles and possibilities
As most countries struggle to tax crypto, the US has created a working system for tracking it. Maybe a few lessons can be drawn from how they managed to create such a robust and fit for purpose cryptocurrency taxation system.
The US Internal Revenue Service (IRS) on cryptocurrency taxation
Any profit that you as a trader makes from trading cryptocurrency is taxable as a capital gain. According to Internal Revenue Service (IRS), cryptocurrency taxation also occurs when you use it to buy goods and services. However, you have to remember that earnings gotten from the mining of different cryptocurrencies are income.
Taxing cryptocurrencies is complicated. Even with the developed laws, nations including the developed ones still find it difficult to tax them. For instance, in the United States, the Internal Revenue Service (IRS) is the only regulatory agency, which has offered guidance in relation to cryptos. Moreover, IRS has continually set the tone on crypto policy.
Ethereum, Bitcoin as well as other cryptos are taxable. The reason is that IRS considers them as property. Therefore, they are taxed just like any other asset including gold and stock.
How Does IRS Regard Cryptocurrency?
As I said earlier, the Internal Revenue Service (IRS) considers cryptocurrency as property. Moreover, over the years, cryptos have turned into good long-term investment as well as a volatile asset for those who want to trade in them for a short period. Despite its high growth, determining the best way of taxing it is ambiguous and complicated.
The way cryptocurrency is treated is applicable to all transactions. IRS requires you to record each transaction and compute the capital loss or gain. You even have to record the daily activities like purchasing pizza or a cup of coffee.
The Four Main events when Cryptos are Taxed
The first event that results in the taxation of crypto is selling cryptocurrency for fiat. An example is selling Bitcoin to get US Dollar or even selling Ether for GBP. The second event is trading cryptocurrency. For instance, trading Bitcoin for Ether. Remember, changing the same crypto is not allowed.
The third instance of being taxed is when you use cryptocurrency to purchase a good or even a service. An example is using Bitcoin to book an airline or hotel when going for a vacation. The last event is when you get crypto because of exchanging it for goods and services, airdrop, mining, and fork.
The Events When Cryptocurrencies are Not Taxed
In some events, cryptos may not be taxed and one of them is when purchasing crypto using fiat. For instance, buying Bitcoin using income from your regular job. Another one is when donating crypto to an organization that is exempted from paying taxes.
You may also not have to pay taxes when gifting cryptocurrencies. However, the maximum amount that you can gift is $15, 000. Lastly, when transferring crypto from one wallet to another. Remember you should be the owner of both two wallets.
The Crypto Tax Challenges
Recently, “IRS Commissioner Charles Rettig raised some eyebrows when he singled out the growing popularity of cryptocurrency as a big factor behind the sizeable tax gap—the difference between what the IRS collects versus what taxpayers legally owe.”
The IRS finds it challenging to trace the crypto transactions or income in case they are not reported by the exchanges, third parties, or businesses. It means that income is un-taxed. Since there is no clear rule, a lot of non-reporting takes place in the crypto world.
Any time an individual does not report a transaction, the person benefits from tax fraud. The reason is that it is untraceable and even tracing its way is very challenging. Another challenge is the fact that crypto is slowly turning to be cash alternative. This is because some firms are beginning to accept it as a form of payment. However, while cash is highly regulated, crypto is not.
For instance, when doing business in the U.S and you get over $10, 000 cash from a consumer, you must file a currency report. The reports inform the government that a buyer has a lot of money that may have been or may have not been reported in the form tax return.
As for cryptocurrencies, the above rules do not apply. A used car business getting $ 20, 000 of BTC from a consumer does not have to file a currency transaction report. Also, on the tax return of the business owner, it might go untaxed. The fact that there is no central authority in charge of buying and selling cryptos makes the transactions opaque.
Why Did IRS Commence on Crypto Filling Crackdown in 2022?
IRS is strict on crypto filling since it is missing out on about $50 billion of unpaid crypto taxes annually. The IRS understands that if it does not do anything then the gap will increase. As much as the transactions are visible in the blockchains, if the counterparts are anonymous, then it is challenging for IRS to know the people who owe the country taxes.
IRS has been challenged. It has invested heavily in process and form amendments and personnel. Over the past two years, the taxpayers have just been getting the question asking them if they sold, exchanged, or received taxes. If someone says no, then the IRS is forced to audit and even apply the necessary fines. Thus, as a crypto trader, you should be honest with taxes.
Since crypto evasion is an important issue. The IRS as well as the Treasury have a draft rule that companies will use in reporting and collecting information regarding the trades of their clients. The recording of traders’ detailed data transactions will commence in 2023.
After the rules that the IRS draft are in place, then brokerages and exchanges will send detailed transaction data to the customers who made trade and IRS. The two will then use the information in filing taxes. The provided data includes the investor’s capital gains or losses, gross profit from sales, and names and addresses. Through this information, the compliance rate will increase.
The data and the information is important as they will help IRS to catch the people evading taxes. Besides, it will make filing easier for individuals who would like to pay their bills. Remember, it is the unpaid crypto liabilities that highly contribute to United States’ growing tax gap.
The Process of Reporting Crypto Taxes in the U.S
When filing taxes for crypto, you need form 8949. To fill the form, you have to provide the following information:
- Proceeds or sale price
- The crypto’s name
- The date you got the crypto
- The total gain or loss
- Cost basis
- The date you traded, sold, or disposed of crypto
