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.
- 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.
- 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.
Mikhail Golomb 