Confusion Over Bitcoin Taxation Leads to Poor Reporting of Gains and Losses

With Bitcoin and other cryptocurrencies making huge sums of money for those adept at timing the market, the U.S. Internal Revenue Service (IRS) is keen to make sure it receives its cut of the profits.

However, a lawyer from Morgan Lewis & Bockius states that many users do not realise that even when they have used a currency, gains and losses must be reported on every transaction. This causes many to simply ignore the looming issue of taxation.

Poor Reporting is Causing the IRS to Lose Out on Crypto Taxes

Sarah-Jane Morin spoke to CNBC about cryptocurrency taxation earlier today. The partner at the national law company Morgan Lewis & Bockius stated that there seemed to be some confusion over how exactly to report gains and losses made when investing in digital currencies and that this encouraged many to not bother reporting accurately:

“A lot of people treat Bitcoin as cash, or the same as [mobile payment service] Apple Pay… If they exchange it for another cryptocurrency or use it at, say, Overstock.com, they’d have to compare the fair market value of it that day versus their cost basis. They’re not always tracking that kind of information.”

The IRS sees Bitcoin and other digital assets as property, rather than a currency. This essentially means that every time a user buys something with a cryptocurrency, they are creating a taxable event. Each owner of Bitcoin must log the price they bought coins or tokens at and the difference between that price and the one they managed to sell it for as a gain or loss.

Just like any investment, cryptos owned for less than a year are taxed as regular income. Those who have held their coins or tokens longer than a year receive a slightly more favourable rate. This ranges from between zero and twenty percent.

If the price that you eventually sell your digital currency for is lower than it was when you bought it, the loss can be used against the gains made with any other investment in a qualifying asset. Up to $3,000 can also be used to offset standard income for the tax year in question, as well as in future years.

During the period between 2013 and 2015, the IRS only received reports on digital currency holdings from around 800 individuals. Considering that each Bitcoin rose from $13 to $430, this figure is suspiciously low.

Morin seems willing to give folks the benefit of the doubt, however. Rather than accuse all those who experienced gains from their digital currency investments of tax avoidance, she instead states that the often-confusing process and newness of the entire space encourages sloppy record keeping.

However, she did go on to state that the IRS would prefer to see any effort made to report gains and losses than to simply ignore the issue and play “audit lottery”:

“In my view, the IRS would rather see some compliance made with your best effort instead of just throwing up your hands and saying it’s too hard.”

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