Investing in Cryptocurrency? Understand the IRS Tax Implications

There are several reasons why cryptocurrency is piquing the interest of more Americans right now.

While some Americans are cashing checks to cover rent or pay for expenses, others are looking for strategic ways to invest. With the current volatility in the stock market, some people are taking a new look at unique investment opportunities such as cryptocurrency and its most popular currency, bitcoin.

Why cryptocurrency?

Bitcoin, the most widely-traded cryptocurrency, has a finite supply of 21 million coins. It was planned, from the beginning, to avoid traditional inflation problems that affect most other currencies. This appeals to some investors who feel like bitcoin may rise in greater value over the coming years.

Cryptocurrency and the IRS

When bitcoin was first introduced in 2009, the cryptocurrency scene was a bit like the Wild West. However, in 2014, the IRS issued Notice 2014-21, or "IRS Virtual Currency Guidance."

Essentially, the IRS has made it mandatory to report bitcoin transactions of all kinds, no matter how small in value. Therefore, every American taxpayer is required to keep records of their trading practices in any digital exchange.

How is it taxed?

Whenever you buy, sell, or trade cryptocurrency, you face tax implications, just as if you were buying or trading stock. The IRS is viewing cryptocurrency as assets — not currency.

Tax Breakdown:

• Income is realized from any gain

• Gain is measured by the change in dollar value between purchase and sale price

• Short-term holding (under 1 year): Taxed as ordinary income according to your tax bracket

• Long-term holding (1+ years): Taxed at 0%, 15%, or 20% depending on overall income

• Report using Schedule D and Form 8949 or Form 4797

Tax Tips for Cryptocurrency Traders

• With cryptocurrency, normal capital gains strategies apply

• Keep clear records of all your transactions, including when you buy and sell

• Monitor tax rates: any gains made through trading are subject to a 3.8 percent net investment income tax

Revo Taxpayer Advocacy is available to answer questions about tax responsibilities and how capital gains tax could affect your situation.