3 Things You Should Know About Taxes and Cryptocurrency

If you deal with cryptocurrencies, taxes may be a confusing time for you. Cryptocurrencies like Bitcoin and Ether are only becoming more popular and more widely used every year. While you may be an expert when it comes to filing traditional taxes, cryptocurrency taxes are a little different. Here's a rundown of what you should know when it comes to filing your taxes on digital currency this year.

Cryptocurrency Can Be Taxed As an Asset

In 2014 the IRS declared that Bitcoin and other cryptocurrencies are to be considered assets in certain circumstances when it comes to filing taxes. That means they are treated the same way stocks or bonds are treated whereas you can realize a capital gain or a capital loss from trading cryptocurrencies.

• When you sell cryptocurrency at a price higher than what you paid for it, you realize a capital gain and will be taxed on the amount of profit.

• If you sell cryptocurrency for a price that is lower than what you paid for it, this results in a capital loss and can be used to reduce your overall tax liability for the year (if the loss is great enough).

You must buy or sell cryptocurrency in order for the event to be "realized." This is what triggers the need for taxation and creates either a profit or a loss.

It's also important to keep in mind that mining Bitcoin creates income that is taxed as such. If you earn or someone pays you in digital currency, that is also considered income and will need to be converted into its dollar value to be taxed accordingly.

You Must Keep Great Records

Although record-keeping is important in general when it comes to taxes, it's even more important when it comes to cryptocurrency assets. In order to accurately calculate your digital currency taxes, you'll need to keep a record of:

• The fair market value when your digital currency was purchased.

• The Fair market value when your digital currency was sold.

Although this sounds fairly easy, it may not be as accessible as you'd think. Traditionally, when you buy or sell a stock, your broker is responsible for sending you a 1099 form for your taxes. You may not receive one from the marketplace where your transaction took place, however, which means you'll need to keep track of each transaction yourself.

One solution to make this process easier is to invest in cryptocurrency tax software. Some software will automatically sync all your transactions from popular digital currency marketplaces so tracking it becomes a lot easier. Not only that, but you can produce tax forms quickly and easily.

State and City Taxes May Be Different

State and city taxes usually mimic the IRS-set standards, but some of them may vary in how they tax digital currencies. Sales tax can be tricky, since not every state has sales tax. New York, for example, classifies cryptocurrency as an intangible asset and exempt from sales tax. Conversely, Washington places the burden of sales tax collection on the seller. Still, other states have not specifically addressed cryptocurrency taxes or lump them in the same category as digital goods or downloads. Always make sure to research your state's specific policy when it comes to cryptocurrency as you are filing taxes.

Although taxes can be confusing when it comes to digital currencies and taxes, you can be sure that the laws will get more clear in the coming years. If you are hiring someone to take care of your taxes this year, make sure that they have a good knowledge of cryptocurrency laws. Even a well-seasoned CPA might not have the right knowledge of Bitcoin or Ether, so make sure you ask them before you file your taxes. Avoid anyone who proclaims that they are a self-taught cryptocurrency tax expert. Also, many large companies are now offering cryptocurrency taxes as part of their packages due to the growing demand from customers.