Investors often take steps to diversify their assets to better ensure a strong portfolio. In addition to various stocks, bonds, savings accounts and real estate, more and more investors are turning to cryptocurrency as another option to add to the mix. According to a recent report by the Financial Advisor, 59 million Americans have chosen to add some form of this digital asset to their portfolio.
Unfortunately, the tax rules for this relatively new form of currency remain unclear. In most situations, the Internal Revenue Service (IRS) expects taxpayers to report cryptocurrency in much the same manner as how they report mutual funds or stocks. As a result, it is wise for those who transact with this asset to recognize that these dealings are likely taxable events. They are not occurring behind the IRS’ back, so to speak. The feds are well aware of the presence of this asset and they are starting to enforce reporting regulations.
How do the feds tax crypto?
The feds generally consider an exchange of crypto for U.S. dollars or use of crypto to purchase goods or services as probable taxable events. Just how taxes apply will likely depend on how long you own the asset before the taxable event. If less than a year, the IRS will likely apply traditional income tax rules. If more than a year, capital gains rules may apply.
How can taxpayers reduce the risk of a surprise tax bill?
So what’s a taxpayer to do when working with crypto? As with all things involving finances, it is a good idea to keep thorough records. It is also wise to know when you are in over your head. It is in your best interest to reach out for help if unsure of the tax implications of a transaction or if you receive an inquiry from the IRS. The attorneys at Goldburd McCone are experienced in this novel, niche area of tax law and can advocate for your interests when it comes to cryptocurrency tax compliance, regulation, and enforcement.