While they’ve been around for nearly a decade now, cryptocurrencies like Bitcoin and Ethereum have taken the world by storm in recent years as the next big investment. However, even as public awareness grows, many don’t know that the Internal Revenue Service (IRS) has a policy on taxing cryptocurrency trades. Here’s what you need to know.
When Did the IRS Get Involved?
It took until 2014 – five years after Bitcoin’s launch – for the IRS to issue a statement on cryptocurrency. Despite “currency” being right there in the name, though, they decided that Bitcoin and its alternatives should be taxed like property. This regulation, until recently, has been seldom enforced. It’s estimated that barely more than 800 people paid taxes on virtual currencies in the last few years. But all good things come to an end – cryptocurrencies will be harder for the Agency to ignore now that they’ve infected the public consciousness. And they already have cutting-edge software like Chainalysis to help track down any criminals or would-be violators.
What It Is: Buying and Holding (And How it Dodges the Tax Problem)
Within the cryptocurrency community, “buying and holding” is known as “HODL.” HODL doesn’t stand for anything – It’s just a slang term that sprang up from a drunken, typo-laden rant by a user all the way back in 2013. The practice itself is pretty straightforward. First, you get your Bitcoin or Ethereum. Next, you have to avoid selling it before it reaches your target price. This is a long-term strategy that requires self-restraint. Virtual currencies are, by their very nature, more temperamental and quick to change than traditional stocks or commodities. Sharp drops and sudden spikes are to be expected and selling off every time the price dips will only leave you further in the red. Since it’s the buying and selling of the cryptocurrency that is taxed, you can avoid the IRS’s attention in this manner.
Other Strategies for Avoiding Taxes
Only Lose: Another way to avoid taxes on your virtual currency is to make sure that you never turn a profit on it. This, too, likely frees you from any tax obligations on your trading.
Hide: Just kidding. You’re no digital gangster and even Al Capone was taken down for tax fraud. It’s illegal and you will be found out. Don’t do it.
The Right Accountant
While we have established that cryptocurrencies can be taxed, we still don’t know many specifics of the matter, such as just how much they can be taxed. So how can you protect yourself and your investments? A good accountant can help, but they can’t just be good – they also need to have experience with cryptocurrency. As it is a relatively new field, this might not be the easiest person to find. But scoring yourself such a knowledgeable ally will be well worth the effort.
The Truth About Your Supposed Anonymity
No one on the internet is truly anonymous anymore. The wealth of personal information available online and the rise of Big Data mean that your digital footprint can be tracked wherever you go. No matter the precautions, your purchase history, search history, and social media can all be used to connect you to your “semi-anonymous” accounts. What’s more, many cryptocurrency distributors have a dedication to transparency built into their mission statements. In other words, if the IRS wanted your name, address, tax ID or just about any other piece of information, all they would have to do is ask.
Tyler Thompson is a second generation St. Petersburgian with a passion for reading and writing. In 2018 he finally made his way to FL Patel Law PLLC where he has found a home for himself as Project Manager. He is an unapologetic dog person who enjoys spending what free time he has with his friends and family.
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