It’s Not Monopoly Money Anymore
I couldn’t resist using the quote I read in a NY Times piece about the confusion over taxes and cryptocurrencies as the title of this article.
The statement brings what started out as a science fiction comic book virtual reality crashing into the harsh world of reality. The geniuses who brought this alternative currency into being did so in hopes of creating a decentralized form of payment that would not be subject to taxes.
As the Times piece points out, “Cryptocurrencies are tax-unfriendly by design. Many of the early adopters of Bitcoin were libertarians and anarchists who were drawn to the technology’s stateless, decentralized nature. And while cryptocurrency transactions are permanently recorded on the blockchain, it’s possible for users to conceal their identities.”
For early investors it must have felt like playing with Monopoly money on steroids! Those days are over now that the IRS has taken a keen interest after last year’s cryptocurrency boom which saw the price of Bitcoin rise more than 1,500%. It didn’t help at all that most of the gains came during the last two months of the year.
No Longer Regarded As Trading Currency For Currency
In its early days cryptocurrencies were traded as currency for currency which is not a taxable event. However, now the IRS is treating cryptocurrency as property. As the NY Times article emphasizes, “That means that every time you sell or transfer a digital coin for something else — whether you’re cashing out Ether for dollars, trading Bitcoin for another cryptocurrency or using Ripple to buy a cup of coffee — you’re creating a taxable event that must be separately recorded and accounted for.”
Now’s The Time To Report Cryptocurrency Transactions
The IRS is giving Americans who have been exploring the world of cryptocurrencies an opportunity to report those transactions without repercussions. Do not be confused into thinking that ‘without repercussions’ means ‘without paying taxes’. That is certainly not the case. However, the IRS is being lenient in these early days while they are getting their arms around the vast and unwieldy issues while simultaneously educating the public about how cryptocurrencies will be taxed.
As a recent article points out, “Anyone with unreported cryptocurrency transactions will be given a fair chance to correct their erroneous tax filings without repercussions. It seems the IRS will not remain so lenient for much longer, though, as this debacle has been going on for several years now.” The article is very clear and makes a case for investors to come forward immediately since, “A voluntary disclosure program is not being contemplated now, nor will it be in the future. This sends a clear message to all US-based cryptocurrency owners and traders to do the right thing rather than face major repercussions.”
For many investors there is confusion about where your cryptocurrencies are held. Are they in a wallet that you own or in an account being held outside of the country? These are other issues that the IRS is attempting to clarify in terms of reporting foreign holdings. It is a complex new world for everyone involved. The best way to stay out of trouble is to come forward with your holdings while the IRS is being sympathetic.