Earlier this week, the Internal Revenue Service (IRS) updated the tax form to be used by individual taxpayers in the U.S. Taxpayers will now have to report their crypto-income to the IRS to avoid any penalties.
The agency sent out a draft to the tax software companies, as well as journalists. IRS maintained that it was just a draft and welcomed its software partners to send their views on the same within 30 days.
The guidance on crypto-related income was much awaited, given that the IRS had been mum on the issue for around five years. The draft contains details on questions that individual investors have had concerning the taxation of crypto-related income.
Details on the Form
It is worth noting that the IRS has not made any significant changes to its initial notice released on March 25th, 2014. The IRS first declared its stand on the taxation of virtual currencies through Notice 2014-21. In the announcement, the IRS stated that they regarded virtual currencies as property, rather than a currency.
Because of this reason, virtual currencies would be subject to the general tax laws imposed on property transactions. This is means that income from the sale of virtual currencies would be subject to either short-term or long-term capital assets tax rates, depending on how long the investor had the virtual currency. Crypto traders and investors would then have to keep extensive records of their transactions to comply with the IRS regulations.
Determining the Fair Market Value of Cryptos
One major challenge that governments have had when dealing with the taxation of cryptocurrencies is how to determine the fair market value.
According to the 2014 guidance, the IRS stated that the value would be determined by converting the cryptos into US dollars. This would only apply to cryptocurrencies already listed on the exchange. The conversion would be done reasonably at the exchange rate and would be continuously applied.
However, given that different exchanges have different pricing methodologies, this would result in different pricing models for individual transactions.
Crypto brokers do not have to provide 1099 forms to their clients. However, the IRS requires that they provide all information on their transactions to avoid tax evasion charges. These details include:
- Cashing out cryptocurrencies for fiat money
- Personal purchases
- Exchanging one crypto form for another
- Receipt of mined or forked cryptocurrency
The following does not constitute taxable events according to IRS:
- Buying cryptocurrency with fiat money
- Donating to a tax-exempt non-profit or charity
- Gifting a third party with cryptocurrency
- Transfer of cryptocurrency between wallets
Impact of new IRS regulations
Retirement account investors will now have an easy time, thanks to the new IRS regulations. A retirement account will not have to pay any taxes on transactions that yield income from the purchase or sale of a capital asset. These charges will be deferred to the future when the account holder takes a distribution plan.
An investor can defer or eliminate taxes due to an investment if they choose to use retirement funds to invest in cryptos. However, investors who are mining bitcoins, rather than trading, will business taxable income rates. These investors would be subject to these rates if the mining involved trade or business.
Taxation of Cryptos in Different Countries
The taxation of virtual currencies has been the subject of discussion in many countries. Several governments do not recognize virtual currencies, thereby evading the issue of taxation. However, with more governments coming on board over the whole affair, there is a need to come up with regulations for the taxation of cryptos.
Here is an outline of the state of cryptos in different countries according to the economic block.
View on Cryptocurrency: considered as a legal tender as of April 2017.
Policy on exchanges: Transactions are termed as legal if they are registered with the Japanese Financial Agency.
This is the biggest market for bitcoin, with almost half of the digital currency’s daily volume traded in the country’s currency.
Hackers have been a consistent issue in Japan and elsewhere. It was the pioneering country to initiate a national system to control cryptocurrency exchanges after its trading was subject to some well-known hackers, including Mt.Gox.
Japanese issued regulations in March 2018 to multiple exchanges and compounded them to close shop altogether after the $530 million disappearances of digital currency from Coinchek exchange.
View on Cryptocurrency: Not legal tender, according to the Financial Crimes Enforcement Network.
According to FinCen, a bureau of the Treasury Department, Cryptocurrency, or Virtual currency does not have legal tender in any jurisdiction whatsoever.
Policy on exchanges: considered legal depending on the state
Cryptocurrency is not a currency, according to IRS. In 2014 it defined it as property and issued directions on how it should be taxed.
View on Cryptocurrency: According to European Central Bank President Mario Draghi, no EU associate can introduce its currency.
Policy on the exchange: Legal in regards to the country.
According to Cryptocompare, about 4% of the cryptocurrencies handled daily are in Euros.
Money laundering and other illicit activities have proved to be a challenge to the European market, according to its leaders.
Autorite des Marches, a France financial regulator, said it would close down 15 exchanges it has blacklisted in the year. The country has announced that it would form a joint proposal with Germany to instill regulations on the cryptocurrency market.
View on Cryptocurrency: Not considered to be legal tender.
Policy on the exchange: Legal if registered with Financial Conduct Authority.
The Financial Conduct Authority has termed cryptocurrency as “high-risk, speculative products.”
View on Cryptocurrency: Not legal tender.
Policy on exchanges: Legal, but there is a strict policy on the use of anonymous bank accounts.
Trading in cryptocurrency makes up about 4% of total trading in XRP exchanges in daily outputs.
The government had not yet decided on how to regulate cryptocurrency. They needed time to deal with the issue, according to one official.