The next big headache for investors? Taxes on your cryptocurrency

The next big headache for investors? Taxes on your cryptocurrency

With the Bitcoin and cryptocurrency craze affecting millions of people who are looking to get rich as quick as possible, one of the questions that is seemingly looming large on the horizon is what taxes are due on such transactions. The U.S. government already seems to be hovering over this issue with legislators angling to regulate this vast new market, although to be fair at around $500 billion, this is still relatively small fry.

Many people holding legacy Bitcoin (BTC) have seen massive gains, some becoming overnight millionaires after the currency soared more than 1,000% in value over the last 12 months. But now comes the less fun part: paying taxes. And some currencies such as Ripple have risen even more—by a massive 10,000% in some cases, too.

The main question which comes out of all this is,do you need to file paperwork for your cryptocurrency holdings?

The answer is yes. Everybody needs to pay taxes on any cryptocurrency transactions, according to Kirk Phillips, a tax professional specializing in cryptocurrencies. In fact, Phillips—who also goes by the moniker “The Bitcoin CPA”—said this applies whether have sold hundreds of thousands of dollars’ worth of coins or a made a single $2 purchase. The latter situation would seem to be slightly ludicrous, however.

Because BTC and other cryptocurrencies are seen as property by the U.S. government, capital gains taxes apply to every transaction made. “It can be very tedious,” Phillips was quoted by Market Watch as saying. “I call it the coffee problem: Even if you were just buying a cup of coffee in bitcoin you would have to report every sale of bitcoin.”

Each sale or purchase technically constitutes two transactions: selling property (bitcoin) and using the proceeds of that bitcoin sale to buy a product. For instance, a person who bought a $1 million home using Etherum would have to pay capital gains tax on the transaction as well as real-estate taxes.

The American Institute of Certified Public Accountants is sending the Internal Revenue Service (IRS) a letter requesting more clarity on cryptocurrencies and taxes, but Phillips said it is likely the government won’t comment, if at all, until closer to this year’s tax filing deadline. Because of this, he suggests people with large cryptocurrency holdings or many transactions to report wait before filing, in case the rules change.

The last time the IRS released guidelines on cryptocurrencies was just days before the individual filing deadline in April 2014. That’s almost four years ago and the value of the cryptocurrency market has increased by hundreds of billions since then. To be safe, Phillips suggested people work with an accountant, in particular one who specializes in cryptocurrency, especially if they have large holdings. “The more you have at stake, the more important it is to get professional advice,” he said.

For those who want to file taxes themselves, selling BTC is treated the same as selling property or any other capital asset. People must report each transaction in terms of whether it was a loss or a gain, which can be difficult given the volatility of cryptocurrencies. In fact with values changing drastically in just a few minutes, the practicality of such a system is well-nigh impossible.

Note: Tokens in the SegWit chain are referred to as SegWit1X (BTC) and SegWit Gold (SWG) and are no longer Bitcoin. Bitcoin Cash (BCH) is the only true  Bitcoin as intended by the original Satoshi white paper.  Bitcoin BCH is the only public block chain that offers safe and cheap microtransactions.

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