No matter what you do to earn your living, you probably have heard about virtual currency by now. If you don’t know much about it, we have you covered. Virtual currency is getting popular with each passing day, and the recent surge in the value of crypto assets is proof of it. Virtual currency, like fiat or traditional currency, is used as a means of payment of goods and services, and like fiat currency, users also have a lot of different cryptocurrencies to choose from. The most prominent virtual currencies are Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH), and Litecoin (LTC), etc.
After acceptance of cryptocurrency regulatory authorities, the next step is to regulate it and tax it. The IRS is on the path to doing just that. The IRS has its own definition of virtual or cryptocurrency, which states virtual currency as “the digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the United States dollar or a foreign currency.” Virtual currency is being accepted as a mode of payment by some major online as well as brick-and-mortar retailers (Microsoft, Overstock, Home Depot, Starbucks and Twitch, etc.), and the IRS can longer leave it outside the tax net.
As per the IRS official website, “Virtual currency transactions are taxable by law just like transactions in any other property. Taxpayers transacting in virtual currency may have to report those transactions on their tax returns.” The IRS acknowledges cryptocurrency as ‘real’ currency, but it does not have a legal tender status in any jurisdiction. However, it is also a matter of time before it happens.
Virtual Currency and IRS:
When the IRS gives virtual assets status of “medium of transaction,” it actually means that the use of these currencies to pay for goods and services or hold them as a store of value will have tax consequences and translate into tax liability. Through its IRS Notice 2014-21 and IRB 2014-16, IRS put out guidelines for individuals and businesses on how virtual currency transactions will be taxed.
In simple words, if you mine, sell or purchase Bitcoin or any other cryptocurrency in the future, you have to tell the IRS about it in your next tax returns. The importance of the IRS’s efforts to bring virtual money into the tax net can be understood by looking at the front page of individual income tax returns or commonly known as Form 1040. IRS asks a yes or no question on Form 140:
“At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
This is an important thing for taxpayers to understand. Taxpayers can no longer transact in crypto assets without telling the IRS about them. If they do that, it will put them under civil or criminal examination for misleading the IRS.
In a nutshell, if you are a tax compliant individual and don’t use crypto assets for hiding your money, you don’t have to worry about anything. Just do what you used to do all your life and keep paying taxes on all your financial transactions, including those which are virtual currency.
The IRS doesn’t want to limit the use of Virtual currency and just expects you to pay taxes for crypto assets.
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Zee Maq is a content writer who specializes in writing business and finance content. She has nine years of experience and loves to provide problem-solving content to help people tackle challenges in their everyday lives.