Cryptocurrency traders could be set to face huge tax bills. Investors and traders might want to think very carefully about pumping their money into cryptocurrencies in the future after the Internal Revenue Service (IRS) announced that anything bought using one of these currencies is liable to capital gains tax.
Tax Picture Clouded
Due to the relatively nascent nature of cryptocurrencies and cryptocurrency investment, many traders and investors have been in the dark about tax regulations related to currencies such as Bitcoin.
Some investors may have been reassured by the fact that digital currencies are designed to work outside of the government and banking industry. However, US tax authorities are still interested in those who trade in the currency, as cryptocurrency is counted as property, not currency. In this way, the recent clarification from the IRS could be a huge blow for many.
Indeed, cryptocurrency traders – often considered a particularly brave and risk-taking bunch – have already had to deal with a wildly volatile market, with Bitcoin surging from under $1 in 2010 to almost $20,000 at its peak. It is this fluctuating nature of digital currencies that compounds the graveness of this tax news for many, as investors can quickly be faced with bills they cannot meet anymore.
Lack Of Professional Knowledge
One of the problems for those who deal in cryptocurrency is the fact that their accountants are not clued up on the intricacies and rules of the sector. As such, there are a number of ways in which traders and investors are falling into traps. For example, transactions from one cryptocurrency to another – Ethereum for Litecoin or Bitcoin for Ethereum, for example – are liable for taxation.
Many investors, however, are unaware of these kinds of stipulations and are left owing money they did not anticipate. Another way for investors to get caught out is by purchasing items using a cryptocurrency. As the digital currency is considered property, exchanging it for products brings a considerable tax burden with it.
The extent to which taxation related to cryptocurrency will be enforced, and how difficult this will prove for the IRS, remains to be seen. However, it is just another worry to add to the list to those trading in cryptocurrencies.