Income tax ramifications of Bitcoin, Ethereum, Ripple Litecoin and other cryptocurrencies
Cryptocurrency is an electronic medium of exchange; Bitcoin, Ethereum, Ripple, and Litecoin have become some of the most widely circulated digital currencies, and the rapid growth of the market has invited both experienced HODLers and new speculators to invest in crypto. But does every crypto user, seller, and buyer understand the tax implications behind a crypto transaction?
In the arena of income tax, cryptos are the same as dollars. Taxpayers must recognize a gain or loss when cryptocurrency is exchanged for other property, in the amount of difference between the fair market value (FMV) of the property received and the taxpayer’s basis in the virtual currency. The character of the gain or loss depends on whether the virtual currency is a capital or ordinary asset in the hands of the taxpayer.
Taxpayers who mine bitcoins or other cryptocurrency also have gross income equal to the FMV of the virtual currency on the date it is received. Crypto currency received in exchange for services or crypto mining may also be subject to self-employment taxes.
Taxpayers using cryptocurrencies to make payments are subject to the same information-reporting requirements as for other forms of payment. Therefore, they may be required to issue W-2’s or 1099’s.
For those of you have jumped into this new and exciting area, contact your ShindelRock tax professional for assistance regarding the necessary record keeping and potential tax ramifications of you bitcoin transactions or visit our crypto tax page for more information.