Are you thinking about investing in cryptocurrency? Then you are on the right track.
Investment in cryptocurrency is generally perceived as a high-risk investment because of its volatility. But, something that most of you miss out on is understanding the digital currency’s fundamentals and characteristics. If done right, it’s a long-term investment that can reap your profits, tax breaks, and help you diversify your investment portfolio — an essential component of any good wealth management plan.
Read on to learn all about cryptocurrency investments.
Are cryptocurrency holdings and transactions taxable?
First up, did you know that cryptocurrency transactions and investments do come under the purview of the IRS? A surprisingly large number of people were not aware of this and were recently jostled awake by the IRS in the form of notices and threats of criminal prosecution to tax defaulters.
Taxes and Cryptocurrency
The IRS has been keeping a very close eye on cryptocurrency holders for a long time now. And now they have initiated a crackdown on people who have held cryptocurrencies but have not paid taxes on them in the previous tax season or have not mentioned it in their tax returns.
The IRS has sent out notices to more than 15000 U.S. taxpayers to amend their 2018 tax returns and disclose all cryptocurrency transactions. This move was accompanied by a strict warning of criminal prosecution against those who didn’t pay the due taxes on their cryptocurrency transactions. Not all transactions are taxable, but the ones that are surely needed to be disclosed while filing federal income tax returns.
What kind of cryptocurrency transactions are taxable?
- When cryptocurrency is traded for U.S. Dollars, i.e., when you convert your Bitcoin (BTC), Ethereum (ETH), or Litecoin (LTC) into U.S. Dollars, you will have to pay a certain amount of tax on it.
- When cryptocurrency is traded for a cryptocurrency, i.e., you want to convert your Bitcoin, Ethereum, or Litecoin into another type cryptocurrency like a Bitcoin to Ethereum, or Litecoin to Bitcoin, etc.
- When cryptocurrency is used for the purchase of goods and services, i.e. when you make a commercial purchase like buying a T.V. or coffee.
When are cryptocurrency transactions not taxable?
- When you make a wallet to wallet transfer.
- When you convert USD into cryptocurrency, i.e. when you invest your money to buy cryptocurrency.
- When you donate cryptocurrency to charity.
- When you make a gift of cryptocurrency to a third party.
Why should you invest in cryptocurrency?
Keeping all the above points in mind, you might ponder if cryptocurrency investment is really worth all the hassle? Yes, it is. The following section will make that abundantly clear.
- IRS treats cryptocurrency as property for tax purposes: This means that any gains and losses made on your cryptocurrency are treated as capital gains and losses just like in the case of real estate and stocks. Taxes on short-term capital gains of cryptocurrency are extremely steep and will be detrimental to your investment. However, taxes on long-term capital gains are lesser, and your chances of profiting from cryptocurrency’s volatility is a lot higher. This brings us to to the next point.
- Treat it as a long-term investment: A huge benefit of investing in cryptocurrency is its volatility. Although many cryptocurrency holders faced a steep loss in 2017, the ones that didn’t were the ones who didn’t sell it to make immediate gains. Remember the IRS treats this as property. So treat your cryptocurrency investments as such. When you pour your money into real estate, you tend to profit only in the long-term. It’s the same with cryptocurrency.For example – If you purchase cryptocurrency worth $5000 today and sell it for $9000 after three years, you will need to pay long-term capital gain tax on the amount of gain realized by you, i.e., $4000. This will be much lesser than any kind of taxes on short-term cryptocurrency gains. In this case, the tax rates applicable to your tax bracket will apply. So, if your income bracket is 10-15% then the rate of tax would be 0, if your income bracket is 15%, then the applicable rate of tax would be 25-35% and 20% for individuals with higher income brackets.
But, if you indulge in continuous buying and selling of cryptocurrency, there are high chances that you might make a loss as the cryptocurrency market is highly volatile and the rate fluctuations are very high.
- Use your ROTH IRA account for transactions in cryptocurrency: You can defer taxes on any capital gains before taking distributions if you buy cryptocurrency inside a ROTH IRA account. This means that if you buy cryptocurrency within ROTH, then you don’t need to pay any taxes on capital gains made in that account.
- Keep your investment portfolio diversified: All your investment avenues be it the stock market, shares, real estate, etc. are open to fluctuations. While many think investment in shares and bonds is less risky in comparison to cryptocurrencies, it’s important for you to have a healthy mix of investments to ensure that you do not put all your eggs in one basket. Hence, if you have earmarked $1000 per month for investments, then a certain portion of it should go toward cryptocurrency. This is mainly because you can reduce the risk of your investment portfolio by diversifying your investment particulars.
Summing up, it’s essential to make use of the latest technologies to make smart investment and wealth management decisions. Going the cryptocurrency way certainly falls into this bracket. The benefits, profits, and tax breaks from cryptocurrency investment make it well worth the time to research and decide if its best for your financial security.
Do not hesitate to contact your MyTaxFiler expert if you are looking for some sound investment advice. Investing in cryptocurrency can prove to be quite beneficial to you, but only if you do it right. A mix of investment is what we recommend. Opting for smart wealth management options can ensure all your money is invested and used in the most optimized and profitable manner.