What is cryptocurrency?
The process of buying cryptocurrency is still somewhat unclear for most of us. It’s not a stock, a bond, or really any type of traditional investment. Unlike previous fads that were popular with investors, buying cryptocurrency is fundamentally different. It is different because you are investing in the currency itself instead of securities that change depending on the value of currency. In essence, it’s just a digital form of currency trading without a traditional market.
How do I get it?
For most people in the U.S. interested in investing in cryptocurrency, Coinbase would be the easiest option. There you can purchase cryptocurrencies such as Bitcoin, Ethereum, or Litecoin. Coinbase is the most widely used and currently the safest way to buy and sell. It also has a very simple interface and has a large supply for quick exchanges. Other platforms have much lower supply so a sale or purchase could take longer not to mention with higher fees and less security associated with it. After verifying your account, you can easily buy a cryptocurrency with credit or debit cards, U.S. bank accounts, or wire transfers of funds- but check with your bank or card company to be sure.
Cryptocurrency transactions are not anonymous as some may think, and the identity of the currency owner can be traced back to a real-world identity. Some think that because you may not be prompted for personal information to exchange, it is safer, and you will not incur taxes. However, the opposite is true, since every computer has a personal IP address, you are no more anonymous than running a credit card at a store.
But be warned, it is not treated as currency like the U.S. dollar; meaning the IRS levies taxes on cryptocurrencies just like they do for capital assets like stocks, bonds, gold and real estate, and thus it is subject to short and long-term capital gains when held for a period of time.
How is it taxed?
If cryptocurrency is being traded like a dollar in any way, whether it be trading it for another cryptocurrency (after calculating the current fair market value in USD) or using it to directly buy goods or services, these are taxable events and you need to record this transaction as taxable income as well as sales tax if applicable. Capital gains tax is also applied if traders have invested in cryptocurrency speculatively with the express purpose of making gains. Most nations split these capital gains taxes into short and long-term gain categories depending on various criteria.
Like individuals and companies are taxed differently for income and wages, the same is true for cryptocurrency. Companies are taxed based on enterprise-grade operations that are large and deal with a relatively large amount of cryptocurrency.
The bottom line?
We are not questioning the validity of cryptocurrencies as a form of short or long-term investment, only informing you that regardless of the intended use you need to understand how to comply with and pay the IRS if you own or use cryptocurrency until the tax code changes.