Dear Steemit Friends,
First of all, Happy Valentines Day! Bitcoin and Cryptocurrencies seem to be getting some love from ole Cupid today. It's a good day (week even) for all of us who are consistently HODLing cryptocurrencies for their impending rise back into the stratosphere and beyond.
I saw an article on CNBC today titled Barely anyone is paying the taxes they owe on their bitcoin gains and it got me thinking. How many people actually report and pay taxes on their cryptocurrency earnings? In the past 5 years that I have been involved in the digital currency space, there have been many discussions, regulations, and laws passed on digital currencies - all of which have held very little water and any real enforcement.
With the increased popularity and visibility of Cryptocurrencies like Bitcoin this past year, I'm sure the IRS has their lenses focused even more on digital currencies. In this day-and-age, some employees are paid with Bitcoin and other currencies, more than a few retailers and online establishments accept digital currencies as payment, and a number of us hold the e-currencies as assets and investments.
In 2017 the IRS clarified the tax treatment f Bitcoin and other digital currencies. In its Virtual Currency Guidance Notice 2014-21, tax is handled depending on how digital currencies are held and used:
Bitcoin used to pay for goods and services taxed as income
If you are an employer paying with Bitcoin, you must report employee earnings to the IRS on W-2 forms.
- You must convert the Bitcoin value to U.S. dollars as of the date each payment is made and keep careful records.
- Wages paid in virtual currency are subject to withholding to the same extent as dollar wages.
Employees must report their total W-2 wages in dollars, even if earned as Bitcoin. Self-employed individuals with Bitcoin gains or losses from sales transactions also must convert the virtual currency to dollars as of the day received, and report the figures on their tax returns.
Bitcoins held as capital assets are taxed as property
If you hold Bitcoins as a capital asset, you must treat them as property for tax purposes. General tax principles applicable to property transactions apply.
If the Bitcoins are held as a capital asset, like stocks or bonds, any gain or loss from the sale or exchange of the asset is taxed as a capital gain or loss. Otherwise, the investor realizes ordinary gain or loss on an exchange.
Bitcoin miners must report receipt of the virtual currency as income
Some people "mine" Bitcoins by using computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger.
According to the IRS, when a taxpayer successfully “mines” Bitcoins and has earnings from that activity whether in the form of Bitcoins or any other form, he or she must include it in his gross income after determining the fair market dollar value of the virtual currency as of the day he received it. If a bitcoin miner is self-employed, his or her gross earnings minus allowable tax deductions are also subject to the self-employment tax. [Source]
The Bulletin is fairly black-and-white, however, leaves a lot to debate and does not seem as if the government is fully policing the tax policies it has in place given the complex nature and understanding of regulating and tracking digital currency transactions.
Currently, fewer than 100 of almost 250,000 people who have filed their income tax have reported any cryptocurrency gains and losses. This is a small number vs the overall number of tax-payers in the United States. Even less, if any are reported globally. The IRS has been trying to crack down on exchanges like Coinbase by requesting the exchanges user records as a result of a recent court case that was filed. You can assume that the IRS will continue its pursuit with other exchanges as this evolves. This, however, only covers a small percentage of people who are involved with digital currencies since there are millions more transactions and dealings that don't go through public channels that the IRS cannot account for.
Cryptocurrencies are considered to be a property when it comes to taxes. As such, everyone should be reporting any capital gains to the IRS. Currently there are no penalties, however as we move forward in this space, the government will definitely want to get their piece of the pie. I don't know about you, but like most people, I can hardly track my overall digital currency earnings and expenditures and often times just hold my assets without ever really looking at what price I got them at, the value when I mined them, and or how much I have earned, saved, or sold at any given time. It is too tedious and complex and since governments have been so "wishy-washy" about supporting cryptocurrencies, I don't feel any urgency to pay for them. Aside from the fact that I still hold all of my digital assets, the prices can fluctuate wildly from day-to-day making it difficult to determine what to actually list in my earnings and losses.
In countries like the Philippines, where I lived for several years, salaries often times aren't even enough to support an individual's daily expenses. In regions where so many people struggle to get by, digital currencies and platforms like Steemit have helped change lives. For governments like this, who already have high tax rates and show no kind of support for their people and this new technology, I don't see why they should get a cut. Why pay someone something that they don't even support?
No one knows for sure how many people around the world hold a cryptocurrency portfolio as of right now and it's not certain if anyone will ever be able to find out for sure - it is very unlikely. Although there are many more research firms and digital currency tracking tools coming out daily, I doubt that the number of individuals reporting their gains and losses will increase dramatically. Even if citizens start reporting them, it will never be 100% accurate or complete.
It remains to be determined if any changes or updates will be made on the IRS front, but several people are waiting until the April timeframe to decide how they will proceed. What are your thoughts? Do you report or plan to report your cryptocurrency gains and losses? Let me know in the comments section below. If you do have any questions, inputs, or feedback, please also share those with me. I would also appreciate support in the form of Upvoting and Re-steeming my post if you found it informative.
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