As cryptocurrency grows more popular, the IRS and other government agencies will become more adamant in wanting investors to pay taxes. There is already an increased level of scrutiny within the cryptocurrency industry. Therefore, if you made a considerable amount of return on cryptocurrencies last year, you must consider filing your tax returns. Don’t think that you can run away from paying taxes because the US government is asking for exchanges to provide information about investors who made more than $20,000 during the financial year.
With cryptocurrencies, governments around the world are in limbo. The anonymous nature of cryptocurrencies makes it easy for people to go on exchange as without having to provide identification. However, this was only available during the initial state of cryptocurrency introduction to the world. After it got uncontrollable, the government made it compulsory for people to identify themselves in order to open a cryptocurrency account. In fact, this is one of the ways that the government ensures people will pay their taxes.
As we move into 2018, more governments realize that people are not filing tax returns for the income that they received from the Bitcoin boom. According to Credit Karma, only 0.4% of the total tax returns were reported for cryptocurrency transactions. Therefore, there is a huge discrepancy considering that the market capitalization of the cryptocurrency world is now nearing $1 trillion. According to the US government, cryptocurrency is defined as a property and cannot be a currency. This is for taxation.
As a result of this ruling, any gains or losses you make on your cryptocurrency transactions must be reported. On top of that, if you exchange your currency for another currency, you will have to pay taxes on the gains that you made. Hence, you will have to identify every virtual currency transaction that you made, how you acquired it, and the profits that you made from it. If you trade cryptocurrencies on a daily basis and you didn’t keep up with your transactions, this process can be a nightmare.
Cryptocurrency investors believe that if they change a cryptocurrency from one to another, they will not be taxed. However, due to the tax reform, this possibility no longer exists. Coinbase, the world’s most popular cryptocurrency exchange, lost a legal battle to defend their customer’s records. Therefore, they are required to provide details about their US users.
What about cryptocurrency miners?
If you want to trade cryptocurrencies, you will still be taxed. Mining is a process that helps maintain the blockchain. On top of that, if the mining activity constitutes a trade or business, mining activity will not be undertaken by the taxpayer as an employee.
Bitcoin mining is no longer something foreign in the cryptocurrency world. In fact, it is well-known that Bitcoin miners use a lot of computing power to mine cryptocurrencies. In this area, some practitioners disagree with the approach that the IRS is implementing to tax miners. They argue that just because somebody finds the precious metal or asset, it doesn’t mean that it is a taxable event. For precious metals to have value, they have to be sold first. Through the tax reform, even if the money is received into a miner’s online wallet, it can be considered a taxable account.
People further argue that this may not be the right move. When there is an exchange, there needs to be two parties. However, when a Bitcoin miner receives the coin, all this does is increase the number of coins in circulation. Therefore, no gain is made until the miners sell the Bitcoins. This is a major flaw in the taxation system that needs to be addressed by the IRS.
Breach of privacy
Previously, cryptocurrency traders believed that they would have complete privacy because they are protected by the blockchain. However, they forgot the fact that the government can still subpoena the exchanges to provide them with necessary information about people who engage in transactions online. As a result, the IRS now has information on all of these traders.
The next step than the IRS is taking is giving out warnings when the person doesn’t report the transaction. Subpoenas were given to companies and promoters involved in issuing cryptocurrency. One of the SEC’s main concerns at the moment is to protect the interests of investors from scammers in the ICOs.