3 Things You Need to Know About the Taxation of Cryptocurrency

In 2017, the dramatic rise in the worth of the popular cryptocurrency Bitcoin dominated the news cycle for good reason: the price of a single Bitcoin on New Year’s Day in 2017 totaled just under $1,000. By mid-December in that same year, its value had exponentially increased to almost $20,000, leading to an international conversation about the long-term stability of Bitcoin and generating great interest in many lesser-known cryptocurrencies, such as Ripple XRP, LiteCoin, and Ethereum. While Bitcoin’s value has declined since December to its current worth of around $11,000, a general public interest in cryptocurrency remains, particularly among younger Americans. According to an article published by Markets Insider, investments firms have witnessed significant interest in investments in cryptocurrencies from the millennial generation, while Google reports that the number of searches for the phrase “buy bitcoin” have surpassed the number of searches for “buy gold.”

 

While this technologically advanced form of currency possesses the allure of modernity to draw in young Americans, it’s important to note that novelty does not absolve any cryptocurrency from the regulations to which traditional forms of money are subjected. Below are three things that anyone who is thinking about investing in or using cryptocurrency should know about how they are used and taxed.

 

1. Cryptocurrency is treated as property, rather than as currency, for tax purposes. This decision, which was handed down by the Internal Revenue Service (IRS) in 2014, means that cryptocurrencies are subject to the rules that apply to intangible forms of property such as stocks, bonds, and other capital assets. Due to this classification, lower capital gains tax rates are applied to cryptocurrencies instead of the higher income tax rates applied to traditional forms of currency.

 

2. While tax rates on cryptocurrencies are lower, the fact that the IRS has labeled them as property makes purchases more difficult. If you choose to make a purchase with a digital form of currency—even something as miniscule as a meal from a crypto-friendly restaurant—you must keep thorough records of these “taxable events.” The taxes applied to the transaction are on par with those of deals like stock transactions. Buying goods and services through cryptocurrency will require users to translate the digital currency into the fair market value of the U.S. dollar at the time they make a purchase, and they may also owe sales taxes depending on the location and nature of the transaction. While exchanges like Coinbase will typically keep a record of a user’s cryptocurrency transactions within their database, experts still suggest that users maintain their own records.

 

3. The purchase of cryptocurrencies using traditional currency is not considered a taxable event. A buyer will not pay taxes during the initial transaction, wherein standard currency like the dollar is converted into digital currency like Bitcoin. Capital gains taxes generally apply to cryptocurrency transactions only if they are the result of a purchase, trade, or sale. Some people choose to purchase cryptocurrencies and hold on to them indefinitely in the hopes that they will grow in value, never using them in transactions. In those cases, when cryptocurrencies are held by a person for over a year without using them, a long-term capital gains tax will then be applied to the digital currency.

How Blockchain Can Dramatically Improve these 3 Major Industries

In a January 2018 article published on the Forbes magazine website, blockchain was named as one of 11 industries poised to become among the most significant digital disruptors of the future. While the experts believe that all industries will be affected by blockchain in the next several years, the following will have particularly significant gains to make if they choose to fully embrace the technology.

 

1. Real Estate

 

The real estate sector could benefit most from blockchain in an important way: the ability to abandon paper-based records in favor of a highly secure digital approach. Even the simplest real estate transaction is rife with paperwork. Every step—from opening escrow and obtaining insurance to securing mortgage approval and negotiating closing services and costs—requires hours of paperwork sent back and forth between the buyer, seller, and all involved intermediaries. In addition to unnecessarily prolonging the property-buying process, all paperwork is susceptible to human error, creating the possibility for mistakes that could later become public record. Paper-based records also have a greater potential for fraud, which can result in higher operating costs. Since the blockchain can automate the process of tracking documents, confirming their accuracy, and seamlessly transferring property deeds, real estate transactions can be conducted quickly, cleanly, and more precisely. Additionally, blockchain could completely eliminate the need to involve escrow companies, as funds within a real estate transaction could be released to the appropriate parties once the conditions of a smart contract on the blockchain are met.

 

2. Health Care

 

The field of health care has a lot to gain from the implementation of blockchain technology because it has the potential to restructure the entire health care system in a way that can help patients to obtain more accurate information and more comprehensive care. One of the foremost problems that health care providers struggle with is the inability to access the full picture of a patient’s medical history. This is due to the fact that patient data is not always easy to track down from past medical providers and because sensitive information is difficult to share with new doctors due to security threats posed by cyberattacks. Blockchain presents medical providers with the option of storing their patients’ medical history within a secure hub where they can safely and easily be shared with other professionals. Ultimately, this leads to a reduced likelihood that records will become lost, which can cause an individual to encounter issues with continuity of care. The more accurate of a picture that members of the medical community have of their patients’ entire medical history, the more likely they will be to correctly diagnose illnesses and prescribe treatments that save lives.

 

3. Crowdfunding

 

The impact that blockchain can have on the crowdfunding industry has everything to do with its affordability. Crowdfunding is a relatively modern concept that many in the business world see as a more accessible, small-scale alternative to venture capital funding. However, what these two forms of raising capital have in common are the high fees that entrepreneurs encounter when attempting to fund their creative ventures. Centralized crowdfunding sites such as Indiegogo and Kickstarter serve as an intermediary between individual online investors and the entrepreneurs who are trying to gather financial support for their ideas. They retain investors’ donations in escrow until the contract between an entrepreneur and his or her investors has been fulfilled. While this is in the best interests of donors, the fees for using these services are surprisingly high, and they reduce donations that could otherwise be put directly toward the entrepreneurial venture that donors intended to support. To retain these donations in full, entrepreneurs can use the blockchain to issue their own cryptocurrencies, which investors later have the option to trade in for services, products, or cash from the entrepreneur’s company. These investments are secured by smart contracts in which rewards and equity in exchange for contributions to a venture are distributed automatically once the terms of the blockchain-based contract are met.