CRYPTOCURRENCY. Cryptocurrency. CrYpToCurrency.
It comes in all shapes, sizes, and prices - bitcoin, litecoin, ripple, monero, and ethereum are just a few of the digital currencies swarming around the web.
If you are absolutely clueless about these terms, just follow the Career Goddess Academy and we'll keep you informed about the hottest coins on the market.
Here is what I've noticed after I started dipping into the world of virtual currencies: you either love cryptocurrency or you hate it.
There are some cryptocurrency critics who won't dare touch any type of virtual currency that doesn't come with some sort of legal governance. Cryptocurrencies are known for their ability to easily transfer money without the interference of governments and big banks. There aren't many rules to the cryptocurrency game.
And that my friend is why some people can't take their eyes off of these attractive "assets".
But will that last? Will bitcoin put big banks out of business? Is it possible for bitcoin to win its status as "legal tender" in the United States (well Japan made it happen in early 2017)? Which cryptocurrencies will survive?
There are so many questions. Unfortunately, there seems to be limited answers for now.
But here's one thing that's not up for debate: trading cryptocurrency is a taxable event.
So if you've been selling bitcoin and realizing gains, let's talk taxes asap before you start getting bad behavior notices from the IRS.
Was I the only crypto junkie who had no idea that I was supposed to report my cryptocurrency activity to the IRS?
If you traded bitcoin and didn't claim it on your tax returns, you're not alone. According to an Internal Revenue Service investigation, only 802 individuals reported a transaction on Form 8949 using a property description likely related to bitcoin.
I don't do taxes. What the heck is Form 8949?
This form is used to report sales and other disposition of capital assets. The IRS is cracking the whip on those who fail to report capital gains and losses from investment activity. You have to report both short-and long-term capital gains and losses from sales or investment exchanges.
Cryptocurrency holders, this form applies to you!
Are bitcoin and other cryptocurrencies considered a capital asset?
Yes. Capital assets typically include property such as a car, home, or investment (stocks and bonds) that a person owns. When you sell a capital asset, you recognize a gain or loss. Yep, there are winners and losers to this investment business.
How do I determine the amount of my gain or loss when I sell a capital asset?
You better know your basis.
The basis is typically the amount that you pay for an asset.
Let's talk about your basis for bitcoin.
You buy $105 worth of Bitcoin in Coinbase using my referral code. Bonus: you get $10 and I will too!
You sell your Bitcoin for $200. You now have a gain.
When you have a gain, you need to keep track of cost basis ($105), date, sale amount, and any related fees.
The fees (there are fees for buying bitcoin on Coinbase) can be added onto the cost basis when buying. These fees can also be taken from your proceeds when selling.
The fees that you have will reduce your gains. Do you know what that means? Lower gains equals lower tax payments.
So let's get back to calculating your gain. You have your basis. Now you have to count the amount of money you received when you sold your asset.
There you go. Your selling price minus your basis is your capital gain or loss. Tada!
How do I classify cryptocurrency for tax purposes?
Are you holding bitcoin as a capital asset? Hmmmm....
Well your other option would be to use Bitcoin to pay for your goods or services. If this is the case, your bitcoin is taxed as income.
It doesn't work this way if you are using bitcoin as a capital asset aka investment (buying and selling). Since cryptocurrencies like Bitcoins are considered as capital assets, you have to treat them as property for tax purposes.
Remember all those rules that apply to property transactions? It's time to reread those rules and consult a financial concierge like me to assist you with your research.
Wait, do I have to pay taxes if I buy or hold crypto?
No. You are not penalized for participating in the cryptocurrency market. You only pay taxes if you receive a gain.
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