tax law

The Tax Implications of Cryptocurrencies

Tax Law

Cryptocurrencies are all the rage now.  Built on a concept called “blockchain,” cryptocurrencies are becoming more and more prominent in our society and, importantly, are getting more attention from government agencies.  Accordingly, in this article, we are going to discuss some cryptocurrency basics and the tax implications of cryptocurrencies.  

If, after reading this article, you would like to discuss your own tax situation, we invite you to call the Sarasota tax lawyers at the Law Office of Mary E. King, P.L.  The Law Office of Mary E. King, P.L. can make sure that your tax issues are resolved efficiently and at the lowest cost to you.  Please fill out our online contact form, or call us at 941-906-7585 today.

What Is Cryptocurrency?

Cryptocurrency is a virtual currency that is digitalized, encrypted, and decentralized. There is no central authority responsible for managing cryptocurrency like there is for the U.S. dollar. Cryptocurrency can be used to purchase goods and services and is sometimes held as an investment. 

If the virtual currency you are using has an equivalent value in real currency, it is called convertible. Bitcoin is an example of a convertible cryptocurrency. As an experienced tax law firm in Sarasota, we can help you with any of your tax-related questions with regard to cryptocurrencies.

What Are the Tax Implications of Cryptocurrencies?

You might be wondering how to deal with cryptocurrencies once tax season rolls around. Cryptocurrencies have become very popular over the last few years, so it’s really important to understand what you need to do if you have and/or use virtual currencies. Please see the list below for some important facts regarding taxes and cryptocurrencies:

1. Considered Property.  For federal tax purposes, cryptocurrencies are treated as property. Transactions with virtual currency are treated the same way as property transactions, and those general tax principles apply. If you are paid via virtual currency for goods or services, you must include the fair market value of that currency when you are computing your gross income. This will be based on the date that you were given the virtual currency.
2. Reporting Requirements.  You must report virtual currency in U.S. dollars. If the virtual currency used is listed on an exchange that is established by market supply and demand, the fair market value of that currency must be determined by converting it into US dollars at the exchange rate.
3. Mining.  If you successfully “mine” cryptocurrency, you must include this in your gross income by determining the currency’s fair market value on the date you received the currency.
4. Payment for Freelancing.  Cryptocurrency received by an independent contractor qualifies as self-employment income and is governed by the self-employment tax rules.   If you pay an independent contractor in cryptocurrency for performing services and the payment is $600 or more in a taxable year, you are required to report that payment to the IRS and to the payee via a 1099-MISC. The payment should be reported using the fair market value of the virtual currency in US dollars. The fair market value should be computed based on the date of payment.
5. Income Needs to be Reported.  If you receive a payment in virtual currency, it is subject to information reporting, equivalent to other payments made in property. For example, if you pay or receive rent, salaries, wages, premiums, or other compensation in virtual currency that is valued at $600 or more, you are required to report that payment to the IRS.
6. Backup Withholding.  If you make payments using cryptocurrency, those payments are subject to backup withholding, just like any payments made in property. Therefore, the payor must obtain a taxpayer identification number (TIN) from the payee. If the payor does not obtain a TIN prior to payment, backup withholding is required. Additionally, if the payor received notification from the IRS that they are required to withhold, backup withholding must be done.

Complying with Tax Laws

It’s imperative to understand that tax laws and penalties apply to virtual currencies. Simply not knowing the laws and regulations will not exempt you from these rules. You are required to comply with tax laws. If you don’t report virtual currency transactions correctly and timely, you may be subject to reporting penalties. If you can show that underpayment or failure to file information properly is due to reasonable cause, penalty relief might be available. If you’re confused and need help, please contact us, as we are a very experienced tax law firm in Sarasota.

Additionally, if you’ve owned your cryptocurrency for more than a year, you will be required to pay long-term capital gains on your profit. For single filers who earn up to $40,000 per year, the capital gains tax rate is zero percent. If you earn between $40,000 and $441,450, the capital gains tax rate for a single filer is fifteen percent. If you are a single filer who earns more than that, the capital gains tax rate is twenty percent. If, however, you owned the cryptocurrency for less than 12 months, you will only owe standard income taxes and not capital gains taxes.

A profit of any amount must be reported. It doesn’t matter if you only sold a little bit. 2021 is the first year that the 1040 form includes a question specifically about cryptocurrencies. It’s also important to note that if you sell your cryptocurrency for a loss, you can write that off as a loss when you file your taxes.

Look to Florida Tax Lawyers to Help You with Cryptocurrencies

The tax rules related to cryptocurrency can be very complicated, and the regulations are constantly changing. If you log on to the IRS.gov website, you will find a new revenue ruling that examines some common questions from taxpayers and tax preparers regarding the treatment of cryptocurrency. If you’ve already accessed the IRS website and you still feel confused, don’t panic. Just call an experienced tax law firm in Sarasota that understands the rapidly changing rules on cryptocurrencies.

The Law Office of Mary King P.L. offers complete IRS problem-solving services, including all areas from tax debt settlement to planning the most efficient tax strategy for individuals and businesses. We are currently offering virtual consultations. Please call 941-906-7585 to make an appointment, or contact us via our online contact form. We are here and ready to assist you!

The information in this blog post is provided for informational purposes only and is not intended to be legal advice. You should not decide whether or not to contact an attorney based upon the information in this blog post. No attorney-client relationship is formed, nor should any such relationship be implied. If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.

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