Perhaps one of the biggest draws of cryptocurrencies like Bitcoin has been its murky tax status. Throughout the history of the industry there have been few if any set procedures and guidelines regarding the leading digital currency, prompting investors to wonder whether profits from their mining and investing in this area could be seen as "free cash" from the perspective of the IRS. Now, a report by Coin Telegraph suggests that it may not be so easy, although the results are yet to be determined. The IRS will reportedly examine how cryptocurrencies like Bitcoin should be treated with regard to income taxation.
Are Bitcoin and Bitcoin Cash Distinct?
When it comes to taxing, the fact that Bitcoin has recently split into two different currencies has some speculating that the tax implications may be favorable for investors. Earlier in the summer, Bitcoin developers and miners reached an agreement to adopt a new set of protocols, one result of which was that Bitcoin "forked" into two different currencies: the original Bitcoin, as well as a newer "Bitcoin Cash." The newer currency aims to have a faster verification process by virtue of its larger blocks, enabling more users to conduct a larger number of transactions without clogging the network and slowing down processing times.
Investors holding Bitcoin prior to the fork received Bitcoin Cash at the time of the fork, provided that their wallets or exchanges of choice supported the divide. The nature of the split has some wondering if they will be taxed or not.
There aren't preexisting guidelines on how Bitcoin and Bitcoin Cash are taxed, but analysts do seem to agree that there are applicable taxes on sales of either or both of the two currencies. If an owner of Bitcoin Cash sells his holdings and receives the profit as capital gains income, it is taxable.
Digital Currencies are "Property"
According to the Notice 2014-21 from the IRS, "virtual currency is treated as property for US federal tax purposes." This means that transactions on digital properties like cryptocurrencies can be taxed as well. To the IRS, it seems that Bitcoin is a capital asset which can be subject to short-term capital gains (if sold after less than a year) or long-term capital gains if sold for a longer duration. The tax rate will be 15-20% based on the value as determined by the fair market price.
The vigilance of the IRS regarding cryptocurrency profits may require that many investors change their approach to taxes. Because specific tax law may differ from state to state, it's perhaps most helpful to speak with an accountant familiar with the local procedures in order to ensure compliance, particularly for those who deal in cryptocurrencies.