Even those who are not technology-savvy have surely heard by now the references about blockchain technology, cryptocurrencies, and the potential value of both for industries like the blockchain supply chain and individuals. Some have decided to become an investor, or maybe have dabbled a little in mining bitcoin. Some are looking at investing in an ICO, or have an idea for an ecommerce business and want to utilize cryptocurrencies in the business startup.
No matter where they are on the spectrum, understanding cryptocurrencies and weighing the options is as critical to financial health as knowing the ins and outs of a fixed index annuity. So before anyone starts mining, investing, or implementing a business plan, they may want to look at the various types of currencies available and consider what all of this will mean during the next tax cycle, especially as we move toward changes in tax law.
What are the different cryptocurrencies, and how do they compare for different purposes?
The best-known cryptocurrency is Bitcoin. Bitcoin is a currency that was created in 2009, and can currently be used to do everything from book hotels to order items online. Bitcoin services international payments easily and well. And while some people buy bitcoins as an investment, small businesses like them because there are no card fees associated with its use.
Some other cryptocurrencies include DASH and Ether. Dash allows users to make instantaneous transactions with lower fees than Bitcoin, and it is considered one of the strongest and most anonymous cryptocurrencies currently available. Ether is a token that may also be used to pay for transaction fees and services, and is extremely quick, delivering more than double the number of transactions per second than many of the others. Its contract negotiation and facilitation system are less susceptible to fraud, thereby creating greater security for businesses than other types of contracts.
Ripple and Litecoin are two other cryptocurrencies that are available and useful. Ripple markets its asset as a banking tool, emphasizing its value as a high-speed, low-cost payment option for financial institutions. As a result, investors and business owners may find this to be a safer investment. Litecoin is more of a peer-to-peer option that provides a secure wallet, free from viruses, allowing users to view both their account balance and transactions. It can handle a higher transaction volume than many other cryptocurrencies.
This graphic representation may help provide greater details regarding the various cryptocurrencies and their value for specific purposes.
What will all of this mean at tax time next year?
First of all, remember that reporting income for tax purposes is solely the individual’s responsibility. Because cryptocurrency exchanges generally do not issue a 1099 tax form, the responsibility for knowing what was earned over the course of the next tax year is on the individual alone.
Buying cryptocurrency in and of itself does not need to be reported. But it was sold, there will have been either a loss or a gain, and this must be reported. Some investors may believe that, due to the anonymity of many blockchain technologies and cryptocurrency exchanges, if no one is reporting gains to the IRS, then there’s no need to worry. But don’t be lulled into a false sense of security. If these transactions are later discovered, trades can be hit with penalties and fines, as well as potential criminal prosecution.
Remember that even though “currency” is part of the word, the IRS considers cryptocurrencies to be property, not money. Similar to real estate that can be bought and sold, individuals will need to pay taxes if they have a capital gain. It is a good idea to keep an accurate and complete ledger of every trade, including the date the crypto was purchased, how much was paid for it, when it was sold, and the amount received from the transaction. Likewise, those who mine crypto should also report any gains.
In 2014, the IRS published guidelines that can help people sort through how virtual currency transactions are taxable by law, especially as they relate to business or individual taxes.
But keep in mind that 2018 will be a seminal year for the IRS with regard to its interest in cryptocurrency taxation and represents the most substantive changes to tax law in the last three decades. Recent changes to tax law are sure to impact both the individual investor and all businesses choosing to utilize cryptocurrencies as part of the business practices. Specifically, the IRS’s perspective of crypto as property means that there is no exemption for investors who had previously viewed inter-crypto exchanges as non-taxable transactions.