The United States Internal Revenue Service declared that any purchases made using virtual currencies are set to be taxed as a capital gain. The IRS considers cryptocurrency investments as property, not cash. Anyone who profits from selling their digital coins would have to deal with capital gains taxes. Users who sell their digital currencies – which they have held in less than one year – can expect these to be taxed as ordinary income due to the short term nature of its capital gains. Essentially, users will be required to list and report each of their cryptocurrency-related transaction to the IRS.
An example provided by Time Magazine explained: a bedroom set purchased at $3,500 using a $200 portion of a bitcoin in 2016 would result to a $3,300 gain that would be taxed at a long-term capital gains rate of 15%. One would then have a $495 tax hit. But for digital coins held for less than one year, this would be seen as short-term gains and thus taxed at regular income rates.
However, due to the fluctuations cryptocurrencies have gone through the past months – with bitcoin valued at less than a dollar back in 2010, to achieving a price of $997 in 2017, then going to as high as $20,000, and plummeting to $8,000 – digital currency investors might have to pay tax bills which the value of their digital coins no longer match with.
A commenter on Reddit under the “I just discovered that I owe the IRS $50k that I don’t have, because I traded in cryptos..” heading stated: . “I feel like I might have accidentally ruined my life because I didn’t know about the taxes”. The commenter described how they now need to pay the IRS $50,000 because they were able to sell bitcoin valued at $120,000 as the value of these coins is now $30,000.
Another reddit user named Silver-Monk_Shu explained how to evade paying taxes by advising users not to tell the IRS anything: “Move your money out of coinbase and IRS will never..know…they only know about your crypto-to-crypto transactions if you tell them.” But user BitcoinTaxesMeRedditor advised the contrary and explained that the IRS will eventually gain access to crypto records and transactions. The user added that not reporting them would account to fraud and is therefore a criminal issue.
Popular bitcoin trading platform Coinbase was ordered in November by a United States district court judge to provide identifying data on accounts from 2013 to 2015 worth $20,000. The order came after the IRS discovered only 800 taxpayers admitted to having annual bitcoin gains during the same period. Gains not reported could result to tax evasion.