In many ways, cryptocurrency seems like it shouldn’t be something you need to tell people about. After all, the word crypto itself means secret or hidden. Bitcoin and other similar popular digital currencies serve as a way for people to complete international transactions without the risk of fluctuating exchange rates.
Digital currencies also serve important roles in the digital underground and dark web, where people buy and sell items that they don’t want the government to know about. However, despite these somewhat questionable roots and uses for cryptocurrency, it has become a popular investing tool since its value began to increase sharply in 2018.
In fact, even the government has become aware of Bitcoin use and expects its share of profits made from buying, selling or trading cryptocurrencies like Bitcoin.
Any money you make trading cryptocurrency gets taxed
When you purchase a Bitcoin or another unit of cryptocurrency, you pay a particular price per coin or unit. When you later cash out, potentially by trading the cryptocurrency for goods or services, you will likely seek to do so at a profit. In other words, you will do so when the Bitcoin you use is worth more than you originally paid for it.
While that is a smart trading move, it is also a form of income. That means that you have to claim the total increase in value when you file your annual income taxes. The IRS wants to know exactly how much you made on the sale or trading of Bitcoin. If you fail to claim your Bitcoin profits or money you make off of investing or using other cryptocurrencies, you could run the risk of an audit.
Paying now is always better than getting caught and paying later
Paying tax on a smart investment may feel frustrating. After all, the government likely played very little role in your ability to profit off of a trade. However, if you fail to pay the taxes related to profit from cryptocurrencies, you could get caught.
When that happens, the IRS will expect you to pay the taxes that you should have at the time you made the trade. Additionally, you will have to pay a high rate of interest for the delay in those taxes. There will also be fees and fines, which could drastically increase the overall amount you end up paying the IRS.
Your best option is to always pay your tax liabilities as required by federal law. However, even the most diligent individual can make an oversight or mistake. If you find yourself facing an IRS audit or prosecution related to cryptocurrencies like Bitcoin, you should absolutely consider sitting down with a tax attorney to discuss your situation.