Cryptocurrencies were one of the hottest financial markets in 2017 and appear to be gaining popularity this year. Many of your clients are likely dabbling in these markets without realizing the IRS regulations and tax implications. Understanding bitcoin taxes and other issues with cryptocurrency is essential to guiding people lawfully through the process of filing a return.
When Do You Have to Pay Taxes on Bitcoin Gains?
In general, bitcoin and other cryptocurrencies are treated like property, rather than like currency. When invested, they are subject to capital gains taxes in a similar fashion to real estate, gold, and other assets. In general, bitcoin taxes only kick in when people trade them for money, goods, services, or other cryptocurrency. The two exceptions are transferring bitcoin as a gift or using a wallet to wallet transfer between exchanges.
Like other kinds of property, the gains are taxed based on the current value in American dollars. There are no federal sales taxes on cryptocurrency, so the IRS will only take taxes on bitcoin gains when they are traded or cashed out.
Bitcoin Taxes on Transfers
Transfers to another person are viewed as a gift when they meet the same federal requirements and limitations as other gifts. When given to a charity, their value can be used as deduction. When gifted to another person, $15,000 is the important limit. When a gift over this amount is given, a gift tax return must be filed and taxes paid by the recipient.
The IRS appears to have conflicted feelings about cryptocurrencies so this may change in the future. In addition, there are rumors that some cryptocurrency exchanges may be a yellow flag for auditing, so it is crucial to stay on the right side of the law. In particular, it is important that any gift transfer be defensible as a true gift rather than a sale or other kind of exchange.
Calculating taxes on bitcoin gains and managing transfers is currently very easy. However, it is important for CPAs to watch the news on this issue so they can guide clients safely through the process. Cryptocurrencies are no longer a black market asset, so the nature of this market is changing rapidly. Following laws carefully is crucial to avoiding scrutiny from the Feds.
