Bitcoin – the most popular cryptocurrency in the world hit historic highs in 2017 and caused American investors to go crazy to purchase bitcoins. The massive spike in bitcoin demand caused the Internal Revenue Service (IRS) to take special interest in those individuals who cashed out of the cryptocurrency market and became very rich. Though some may think that cryptocurrencies are outside the coverage of the IRS, the truth is that it is considered an investment vehicle and people will have to pay a capital gains tax on them. Along with the fact that cryptocurrencies are considered taxable, every transaction in the blockchain is considered a taxable event for U.S. citizens.
The fact that cryptocurrency is taxable comes from the notice that the IRS issued back in 2014 which provides cryptocurrency and bitcoin traders guidelines on how to go about filing their taxes. The notice gives some background on how the current tax code applies to cryptocurrencies and how the IRS views it as property. The most important part of the IRS notice is knowing the adjusted cost basis of the cryptocurrency so that the taxpayer knows how much capital is gained when it is sold or traded. Each piece of cryptocurrency a person owns has its own cost basis and they may need to be adjusted.
Capital Gains Taxes Could Reach $25 Billion
Currently, Tom Lee from Fundstrat believes that with the growth of bitcoin in 2017, the potential capital gains taxes could reach $25 billion. This is big and it means that compared to other traditional investments like stocks, equities, and precious metals, the capital gains taxes on cryptocurrencies are estimated to be over 20 percent.
Lee believes that one reason for the current selling atmosphere of the cryptocurrency market right now is caused by tax-related sales as people are scrambling to get money to pay for their capital gains. If this is true then the market may see a changed dynamic after the April 15 – which is tax day.