Cryptocurrency and Taxation Law: Legal Implications You Should Know

TL;DR: Cryptocurrency and taxation laws are complex and evolving. Investors must be aware of the legal implications and tax obligations associated with their cryptocurrency investments.

Key Takeaways:

• Cryptocurrency is treated as property for tax purposes in the US.
• Investors must report capital gains on their annual tax returns.
• Foreign accounts holding cryptocurrency may need to be disclosed under certain regulations.
• The IRS has specific forms for reporting foreign accounts, but clarity on cryptocurrency holdings is lacking.

What Are the Tax Implications of Cryptocurrency?

The cryptocurrency market has exploded in popularity in recent years, attracting both beginner and professional traders. However, legal risks exist, particularly concerning tax regulations. Cryptocurrency and taxes are intertwined but not always in a straightforward manner. Here’s what investors need to know:

Cryptocurrency and Capital Gains

In the US, cryptocurrency is classified as property rather than currency. As a result, the IRS imposes a capital gains tax on individual investors. This means that any profits made from selling or trading cryptocurrency must be reported on annual tax returns. Even if cryptocurrency is received as part of a salary, taxes are still applicable.

Foreign Bank Account Regulations (FABR) and Cryptocurrency

The Financial Crimes Enforcement Network (FinCEN) requires individuals to report overseas accounts using Form 114. However, cryptocurrency is currently not included in this form. While most cryptocurrencies are traded in foreign digital wallets, investors are not required to disclose these holdings. This may change, as FinCEN is considering including cryptocurrency in Form 114 disclosures.

IRS and Cryptocurrency Reporting

Similar to FinCEN's Form 114, the IRS has Form 8938, known as FATCA, which requires individuals to disclose foreign accounts. Unlike Form 114, there is no clear guidance regarding the inclusion of cryptocurrency holdings in IRS disclosures. This has led to confusion among investors about whether to report cryptocurrency on FATCA, FABR, or both. Tax professionals often recommend completing both forms to avoid potential penalties.

Final Takeaway

The landscape of cryptocurrency and taxation is still evolving, and many investors find it confusing. Tax authorities are increasingly looking to include cryptocurrency holdings in income disclosures. The future of these regulations remains uncertain. For more insights on legal risks and cryptocurrency, follow Coin Informer!