Nothing is certain but death and taxes. So I’ll start off by answering the elephant in the room… “Do I have to pay taxes on cryptocurrency trades?”
If you sold any cryptocurrencies, and sold at a profit, then this is considered a taxable event by the IRS and most government taxation agencies. Buying “stuff” with Bitcoins, such as video games, exotic cars, or even other cryptocurrencies, is treated by the IRS as the sale of property, and not as an exchange of currencies. The benefits extended to traditional “forex” foreign money exchanges do not apply. As the IRS considers Bitcoin and other cryptocurrencies to be property, and not “currency” – which brings us to…
How long has the US government been taxing Bitcoin?
2014… in theory.
The IRS made it’s first formal statement on the matter of “virtual currency” in 2014. In their report, they mention Bitcoin by name, and classify virtual currencies as “Property” for taxation purposes.
In reality, very few people paid taxes on Crypto-gains until the past year. They estimate that fewer than 1000 people paid taxes on cryptocurrencies in past years (802 to be exact). This will likely change as Bitcoin now holds both greater public awareness and a much higher level of scrutiny by the IRS.
How can I avoid paying taxes on Cryptocurrency?
There are two (three?) common methods:
HODL – Buy & hold. The word, “HODL” is a slang term within the cryptocurrency world for long-term investors who buy and hold cryptocurrencies. It’s relevant here because many cryptocurrency owners, be it people who purchased cryptocurrency or who were given it as a gift, have yet to sell. If you bought Bitcoins for pennies back in 2011, and never got around to selling any, you are likely immune from any tax liabilities. Just hire a good accountant when you trade your Bitcoin for a Lambo.
Only take losses – Wear your string of “bad luck” with pride! If you failed to make any profit from your alt-coin day trading, it is likely that you don’t owe any money. Just like that time you short-sold a house for a 100k loss following the housing bubble burst, or investment in Pets.com stock you held until the day it was delisted (their sock puppet was cute). The good news is that your tax bill won’t be so high.
Hide your money from the IRS – If you want to feel like a modern day gangster, do what you can to hide your Crypto-earnings from the IRS. Before you ask, yes, this is illegal. Also note that most popular cryptocurrency exchanges, such as Coinbase, are subject to audits by the IRS. And Coinbase, in November 2017 (a time when Bitcoin was experiencing record numbers in price and trading volume), willingly turned over reports to the IRS on 14,355 of their users. With the boom in both price and popularity of Bitcoin and other cryptocurrencies in the past year, it’s unlikely that the IRS will let such transactions slide.
What if my accountant says I shouldn’t worry…?
Have you sold any cryptocurrency for a profit in the past year?
If so, I wouldn’t “worry” – but I’d likely seek out an accountant familiar with such issues. While there is much confusion over the extent to which cryptocurrencies may be taxed, it’s clear that the US (and most governments) treat any sale of cryptocurrency as a taxable event. With greatly increased enforcement efforts to tax cryptocurrency profits, it seems like the IRS has a different opinion than that of your accountant.
But I thought it was anonymous!
The nature of Bitcoin, and of most cryptocurrencies, is complete transparency. Any sale or exchange of cryptocurrency is tracked, publicly, along the blockchain. And for most cryptocurrency holders, significant information was required to set up accounts with Coinbase, Binance, and other popular cryptocurrency exchanges. And this information, including the name, address, and tax id of the account holder, can be given to the IRS upon request.