Are Crypto Currencies a Capital Asset?
Since their creation in 2009, cryptocurrencies have rapidly progressed from digital novelties to trillion-dollar technologies with the potential to disrupt global finance systems. Alongside their popularity has come increased regulation – but an overlooked aspect is how the IRS treats cryptocurrency assets as capital assets; which could impose taxes upon your sale at a profit.
The IRS considers cryptocurrencies to be assets since they’re often used to purchase goods and services. When you make a purchase using cryptocurrency, you are in effect selling some of it back for its fair market value at that moment in time. When selling cryptocurrency at a profit, however, capital gains taxes must be applied based on any differences between sales price and fair market value at time of sale.
As with other investments, cryptocurrency capital gains taxes depend on both how long and the price you held it for before selling it; longer holding periods typically result in lower tax rates while short-term gains will be taxed at short-term capital gains rates which vary based on your federal income tax bracket.
When holding cryptocurrency for longer than a year, its gains will be taxed under long-term capital gains rates due to your increased chances of making substantial profits over time.
Keep in mind that your cryptocurrency’s sale price will depend on its market value, which can change frequently. As such, keep good records of your transaction history to determine your cost basis – the initial value that was paid or received multiplied by its number of units plus any entry and acquisition costs.
Though cryptocurrency markets have attracted many people due to the promise of high returns, there have been a number of serious concerns raised about their technology. These include no consumer protections whatsoever, potential links with criminal activities and Ponzi schemes as well as high price volatility of some cryptocurrencies. With increasing awareness surrounding crypto transactions comes increased tax obligations; consumers should consult a certified public accountant or qualified professional regarding any possible changes that crypto transactions might bring on their tax status.