Crypto currency (CC) investors have a lot to think about with the tax implications of buying and selling crypto coins. Many governments are still deliberating about how to get in on the action – in the form of taxation. They know there is big money at stake, and they know they are going broke, so they sure don’t want to miss out. There seems to be no simple answer that all governments can agree on. Should CC’s be treated as currency, as a commodity, as a security, as property, or some combination thereof?
For example, here is what’s happening in the USA. In 2014 the Internal Revenue Service (IRS) determined that “convertible virtual currency”, such as Bitcoin, will be treated as property. This decision means that purchases using CC’s are subject to capital gain (or loss) and investment tax treatment, with all the associated reporting requirements. Given that there are many retailers who now accept CC’s as payment, this means that the IRS requires everyone to do all this when spending their CC:
- record the amount of coins spent
- allocate the cost basis of the coins spent
- subtract the cost basis of the coins spent from the actual price paid
- report the difference to the IRS, and calculate the capital gain or loss, factoring in the date of when the coins were purchased
This all goes in your annual tax return, and you must pay the taxes owed, or claim the capital loss. All this work is generated by the consumer’s choice of “payment method”. Many analysts and commentators are calling this a prohibitive, crazy, quagmire. Can you imagine the nightmare if you purchased two cups of coffee every day, using Bitcoin as your payment method? You might need an army of accountants.
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In the USA there are going to be other problems, as there are four departments that want to treat CC’s in their own special way:
- The Commodity Futures Trading Commission views CC’s as a commodity
- The Securities Exchange Commission (SEC) is treating “some” coins as a security
- The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has stated that “certain activities involving convertible virtual currency constitute money transmission”
- as shown above, the IRS insists on treating CC’s as property
So here we have four different, inconsistent categories for the same thing, which prompts us to remind you to carefully check what’s happening with the CC tax rules in your jurisdiction. We can’t promise you that it will make sense, or be easy to understand. It is another example of the “wild west” nature of this market space.