Cryptocurrency is becoming a part of our daily lives. Many people now make their purchases using it, and some even pay their rent or mortgages with it. But the question remains: Is it a hidden treasure or tax trap?
The cryptocurrency market had grown exponentially since its inception just nine years ago. The market is volatile, but that does not diminish the opportunities for investors looking to capitalize on the digital currency craze. Each of its type has its own characteristics, but all together they are based on blockchain technology. Always make sure that you are dealing with the right one.
This new way to transact money has more tremendous implications for the government’s ability to tax our citizens today than previous forms of currency have had in the past. As demonstrated by a recent court ruling, cryptocurrency is raising new questions about the limits of government taxation.
Why does it matter? Taxation and cryptocurrencies have a long history together, as far back as the late 1980s when, according to FinCEN (Financial Crimes Enforcement Network), individuals began selling e-gold accounts on various websites. The government saw cryptocurrencies as similar to “real” currencies with value and began to tax their use.
But the truth is, cryptocurrencies have many differences from our traditional currencies, including government backing. While these factors were good enough for some early adopters of cryptocurrency, opinions started to shift as more businesses began accepting it as legal tender. Now that more people are investing in cryptocurrencies like Bitcoin and Ethereum, the transactional nature of this has inspired some to argue that they should not be taxed in the same way as traditional currencies.
Cryptocurrency’s ever-changing value makes it difficult to classify — look at the value of Bitcoin over the past year. Was it a payment method or an investment? For some, it is more like a stock than currency: More people are buying and selling cryptocurrencies with the hope of making a profit than using them as traditional money to purchase goods and services. It has been argued that they should be taxable as business income rather than as personal income.
The Philadelphia Gold and Silver Exchange, one of the first companies to accept cryptocurrency in payment for gold and silver coins, was an early entrant into this “cryptocurrency-for-taxes” debate. For some cryptocurrency users, the company’s policy of automatically converting all of its customers’ Bitcoin into U.S. dollars on the day a purchase is made means that they never have to report those transactions on their tax returns — no matter how large the transaction and whether it was business or personal in nature.
The first issue with taxation is defining whether cryptocurrency is a payment method or an investment and classifying relevant transactions and currencies accordingly. The Mint classified Bitcoin and other cryptocurrencies as taxable property in 2014, following the guidance set by the IRS. Still, that classification was challenged by cryptocurrency users in court the very same year.
Another argument used to push back against Mint’s 2014 ruling is that cryptocurrencies are not “real” currencies but rather assets, which opens up a new tax bracket for investors based on capital gains instead of net profits.
The question remains whether its investors should follow the same rules as traditional currency investors or if there should be different standards for each. Its taxation policies are still being developed as new products and applications of this technology emerge.
For the time being, it is best to be transparent with your transactions so that you can pay exactly what you owe without getting caught up in legal battles down the line. Either way, it’s better than ending up like Ross Ulbricht.
The IRS recently issued guidance on the taxation of cryptocurrencies and clarified that cryptocurrency is treated as property for federal tax purposes. The tax treatment of cryptocurrencies depends on whether they are a capital asset in your hands or hold them to make a gain or loss. If it’s held for investment purposes, then it will be taxed like an investment, similar to a stock or bond.
This new way to transact money has more significant implications for the government’s ability to tax our citizens today than previous forms of currency have had in the past. Many businesses currently accept Bitcoin as payment, while the IRS doesn’t issue any guidance about reporting income paid through Bitcoin. The IRS has been working to guide enterprises to. Still, the legislation it is considering doesn’t have any teeth and is unlikely to address all of Bitcoin’s challenges concerning US tax policy.
What cryptocurrencies have done is make crime possible at any scale too. Think about it: you can commit a crime online with no geographic boundaries and in complete anonymity, without anyone knowing your real identity. The dark web combined with cryptocurrency makes this possible because these are intrinsically related to each other. Once again, imagine if you could buy anything anonymously. What would stop people from buying drugs or weapons? Nothing. It’s already happening. Cryptocurrency has given the freedom to internet criminals by creating an alternative financial system outside the control of traditional authorities and without interference from any central bank or government.
Money laundering through cryptocurrency has become a hot topic in the public discourse. Distributed ledgers, with their peer-to-peer networks that can be used to facilitate anonymous transactions with virtual currencies, may be the reason why some industries are facing increased pressure from both investors and regulators worldwide. But then again, the value of cryptocurrency is still relatively low compared to traditional fiat money. Likewise, for this very reason, we can expect several industries to be put under increased scrutiny in the coming years, with large corporations being the primary target of regulators worldwide.
It is believed that some influential people are behind this cryptocurrency, and they do not like to make this cryptocurrency open and transparent. They want to stay anonymous for some reason. And these three things could explain why. 1) By allowing themselves to remain anonymous, they can avoid taxation (withholding taxes). 2) If they ever get caught doing something illegal with their Bitcoin wealth, 3) They probably own billions of dollars’ worth of Bitcoins, which means that there is no real reason for them to do anything good with their wealth.
Currently, the only way for people to realistically invest in cryptocurrencies is through centralized exchanges. Why? Centralized exchanges have the power to enforce regulations, which are good for society at large. They can also protect people from market manipulation or theft of their funds. On the other hand, companies will have to pay income taxes for this work. Since there is not enough transparency in this market, price manipulations can be easily done. Therefore we also need to realize that our society requires that important decisions are made democratically by elected officials who represent their constituents and not by autonomous and decentralized software or small groups of people.
Although Bitcoin started with good intentions, people with bad intentions will always find a way to use things for their own means. When someone cleans money for illegal purposes, they have to hide the source of the funds. The best way to do this is by buying Bitcoins with cash and then selling them on an unregulated exchange for another currency of choice.
In most cases, the Bitcoin exchanges serving a specific country only work with bank transfers. In some cases, they will accept payments from credit cards as well. When it comes to cash payments – especially large amounts – people will always find other means to get around paying fees and taxes. The good news for those who want to promote cryptocurrencies as a means of payment is that there are already some options out there allowing individuals and businesses to easily accept them as a form of payment. All these options already provide usable systems for both, merchants and customers, to trade goods and services with cryptocurrency as an alternative.
Given all these mentioned points about Cryptocurrency, what is your stand? Whether it is a hidden operation treasure, there is no guarantee that it will skyrocket and give you massive gains. On the other hand, maybe you think there is potential in this type of market, so it might be best to put money on them rather than having all your savings in fiat currency such as the euro or dollar It is still very new and susceptible to many changes. That is why it is highly recommended that all of us invest only with the money we can let go if things turn out not as expected or imagined, since there is always a risk associated with any investment.
It must also be said that this type of investment has voracity for high risk and it is more about looking at the potential of new technology and not what we know. So if you want to look at cryptocurrencies as an investment, always be prepared to take responsibility if something goes wrong. However, even though there are many risks associated with investments in cryptocurrency, they may also bring massive profits. But make sure to have a strategy if you want to invest in this new world.