Do you ever feel like the world is changing too quickly to keep up? If so, imagine how the IRS feels! The ways that people earn a living have become increasingly complicated, making it difficult to determine how to tax these different income streams. In addition, these changes can make preparing and filing taxes difficult for CPA firms. There are many potential loopholes but also many possible pitfalls. However, the IRS is tightening down on many new forms of income, including cryptocurrencies such as is bitcoin taxable.
What Is a 1031 Exchange?
Because bitcoin and other cryptocurrencies are not legal currnecy, many investors have viewed their sale and trade as a 1031 exchange. Under IRS guidelines, this is a tax free exchange of property such as real estate. However, Congress recently set the record straight by passing a law that restricts these exchanges to real estate alone.
The law is not clear about whether this applies retroactively. Thus, accountants and clients will need to decide together whether to use a 1031 exchange for bitcoin exchanges.
Is Bitcoin Taxable?
Bitcoin is becoming more taxable – and traceable – than ever before. Although cryptocurrencies were once used to hide money from the government, the IRS has been successful at suing several major companies to get their customer information. Rather than being a place to squirrel away money tax free, bitcoin and similar are increasingly a tax pitfall.
However, there probably are ways to get around paying taxes on bitcoin for the past year. A 1031 exchange as mentioned before is one option. Ultimately, most people eventually remove money from cryptocurrency and buy other things with it, which isn’t allowed in a 1031 exchange even for real estate.
Making Wise Decisions With Cryptocurrency
Is bitcoin taxable? Ultimately, it absolutely is. However, this does not mean it’s a bad financial decision. Cryptocurrency can be a lucrative source of income for many people. While the taxes are complicated, both Congress and the IRS are trying to make the rules more clear. Many clients are using this and other formerly unknown means of earning a living, so it is essential for CPAs to understand the tax implications.
