Much of the confusion stems from a lack of clarity about how much people earning from crypto should be taxed. The IRS says that individuals should be taxed “according to their normal tax rules,” but those rules may not apply when it comes to cryptocurrencies just yet.
The IRS has released guidance on cryptocurrency taxation this week, stating that every individual who buys, sells or uses cryptocurrencies like Bitcoin must pay taxes on selling crypto. However, the tax agency is still struggling to understand how these digital currencies work and how they are used for payment.
Cryptocurrency is a digital medium of exchange that is used much like physical currencies. It exists only in the realm of digital assets and moves from person to person, often through a secure internet wallet or exchange service, but it can be exchanged for fiat currency as well.
The IRS At A Loss Over Crypto Taxation
There are still considerable uncertainties about the taxation of cryptocurrency earnings. This is because there is no formalisation of how they should be classified. In its report, The IRS also states that it has not received any guidance from the Department of Treasury on taxes involving cryptocurrencies. It further states that it is working with the Department Of Treasury to get more information on this subject.
The tax agency further stated that in most cases, cryptocurrency will be treated as property for tax purposes. This means that individuals who earn money using assets of their crypto portfolio, for instance, will only have to pay capital gains tax if they sell their holdings in the forms of fiat currencies or other cryptocurrencies.
Regulations For Crypto Are Still In Flux
While the IRS states that virtual currencies are taxable, it did not provide much information on how they should be taxed. Instead, it says that questions regarding this subject should be directed to the local offices of the IRS. At this time, it seems that there are no set tax rates applied to different types of cryptocurrency earnings or transactions. This is why people who made money recently investing in cryptocurrencies like Bitcoin have not been paying income taxes yet. The same goes for employers who have paid their employees with virtual currency in recent years.
How Will Taxes Change Bitcoin?
The lack of tax guidance for digital currencies does not seem to have affected their growth. At the time of this writing, Bitcoin is trading at $8,300 on exchange and is up 20% over just one week. Cryptocurrencies in general are also doing well, with Ethereum, Ripple and Bitcoin trading above $600 this week.
However, it is not unlikely that some traders and investors are holding off on selling their cryptocurrency holdings until the IRS provides more information on these matters. This could potentially lead to lower earnings in 2018 if people decide to hold off on cashing out their crypto earnings for now.
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