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Cryptocurrencies: Now in the Crosshairs

Cryptocurrencies: Now in the Crosshairs

Cryptocurrencies – a subset of digital currencies, such as Bitcoins – are frequently called altcoins, as in bitcoin alternative.  Cryptocurrency uses encryption technology (or cryptography) in its creation and to ensure the security of transactions. These alternative or virtual currencies operate via decentralized control rather than the standard centralized banking systems, leaving cryptocurrencies under the radar of many tax authorities for many years.

No longer.

As cryptocurrencies become more widespread, and a growing number of merchants begin accepting digital currency, it is not surprising that these transactions are now in the crosshairs of the tax authorities. According to www.coinmarketcap.com, as of June 2017, there were over 900 existing digital currencies. Examples include Ripple, Litecoin, Dogecoin, BitShares, Nxt, Peercoin, FedoraCoin, Primecoin, Auroracoin, Quark and the best known of all—Bitcoin, which accounts for more than 81% of the over $130 billion in total market capitalization of cryptocurrencies.

What you should know about cryptocurrency:

  • It’s enabled by a technology called blockchain, which offers an alternative to traditional transaction processing“Blockchains are ledgers (like Excel spreadsheets), but they accept inputs from lots of different parties. The ledger can only be changed when there is a consensus among the group. That makes them more secure, and it means there’s no need for a central authority to approve transactions.”
  • Identify theft is essentially impossible with cryptocurrency.
  • It’s available and immediate.
  • More and more businesses will accept it – because they will have no choice.
  • It’s volatile: the value of Bitcoin and Ethereum, for example, have swung wildly over the past couple of years.

 

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According to Forbes, the exact legal status of all cryptocurrencies varies significantly from country to country, and in many places, their status still remains undefined. While most countries have explicitly allowed the use and trade of alternative currencies, their classification varies widely between government agencies, departments, and courts. For example, China banned the handling of Bitcoins by financial institutions, and in Russia, while cryptocurrencies are officially recognized, it is illegal to actually purchase goods with any currency other than local Ruble. Both Canada and Australia do not regard digital currency as legal currency, and instead, apply the rules for barter arrangements. In the UK, while the purchase of Bitcoins is not subject to VAT, VAT is levied on any goods or services which are sold in exchange for Bitcoin or any other cryptocurrency.

In 2014, the IRS ruled that in the United States, Bitcoins will be treated as property for tax purposes, rather than currency. This means that Bitcoins, and by extension other digital currencies, are subject to a capital gains tax. This also means that the IRS is now on the hunt for digital currency users since few people report their Bitcoin transactions. According to Forbes, the IRS has begun to search for Bitcoin user identities using specialized software, with these users subject to penalties, interest or even worse.

This month, the Crypto-Currency Tax Fairness Act was introduced in the House of Representatives. This proposal, if passed, would allow tax exemptions for digital currency transactions under $600 and remove any hassle for Bitcoin users on small purchases. Of course, those who use Bitcoins for larger purchases must file Form 8949, which is used to report capital losses and capital gains.

 

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According to Fortune, in 2015 only 802 individuals reported a transaction on Form 8949 using a property description likely related to Bitcoin. Clearly, these numbers only represent a small fraction of Bitcoin users, indicating that most US digital currency users have not filed a Form 8949 over the past few years. For those digital currency users who have spent, or plan to spend, over $600, be aware that these transactions may be very easily spotted by the tax authorities. For those who spend Bitcoins on small ticket items, the hope is that the Crypto-Currency Tax Fairness Act will be passed into law and you will be spared from unpleasant IRS investigations.

If you’d like to learn more about how alternative currencies can affect your tax bill and its treatment for VAT purposes, VATBox can help. VVATBox’s automated technology has helped businesses around the world improve their VAT recovery rate. VATBox’s technology provides complete transparency to the VAT recovery process and always stay up to date on the latest technology and regulation changes. VATBox can help ensure that your company is always in compliance with the latest VAT laws and always has access to the most current VAT-related information. Request a free demo here.

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