How Cryptocurrency Affects Your Taxes

In today’s world, more and more people are dealing in cryptocurrency. Maybe you trade this currency. Or, maybe you even get paid in Bitcoin, Ethereum, or some other form of cryptocurrency. Whatever the case may be, if you are dealing in this type of currency, you need to understand how it affects your taxes.   

One of the first things to understand is that cryptocurrency is currency. And, just like any other form of currency, your use of it needs to be tracked and reported where applicable. That “where applicable” part is where people sometimes get confused.

In general, you’ll need to treat and report cryptocurrency as income in these situations:

l  If you’ve converted your cryptocurrency into a more common currency

l  If you’ve received free cryptocurrency coins

l  If you’ve made money from selling cryptocurrency

l  If you have used cryptocurrency to buy something

Fortunately, not every cryptocurrency transaction is taxable. Some situations in which your use of the currency is not taxable include:

l  Buying cryptocurrency

l  Purchasing cryptocurrency using your self-directed IRA

l  Gifting under $15,000 in cryptocurrency to a friend

l  Purchasing cryptocurrency with a Solo 401(k)

If you’re ever unclear on how to track or tax anything you have done involving cryptocurrency, don’t worry. A professional accountant should know the answer to your question or can at least find it out. While it is becoming possible to use online programs to track and report cryptocurrency transactions, nothing beats real, in-person help and advice.

The reason for this is that cryptocurrency is a new and confusing thing for many people, and everyone, including the IRS, is still trying to work out the kinks. However, in terms of taxation, the rules are pretty clear and easy to follow, but only if you have the right professional helping you to understand and follow them all.