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December 08, 2021 | Posted in:

The hidden tax consequences of cryptocurrency

You have probably heard of Bitcoin and maybe Dogecoin and Ripple. There are more than 4,500 cryptocurrencies and all of them have hidden complications. Here’s what you need to know.

 

Every transaction has a tax consequence.

The IRS treats cryptocurrency as investment property, and every transaction is treated as a capital gain or loss. Let’s say for example, you buy Bitcoin for $10, the value increases to $15 and you use all of it to make a purchase. The IRS considers that a $5 short-term gain.

 

Big gains mean big taxes, but losses may be limited.

There is no annual tax cap for gains on cryptocurrency sales. Yet there is a $3,000 annual loss limit. You will need to budget appropriately for taxes whenever you use or sell cryptocurrencies.

 

Cryptocurrencies put you on the IRS’s radar.

The IRS is so concerned about potential tax mistakes and fraud related to cryptocurrency that the first question on the tax form is if you had any cryptocurrency transactions in the past year. With the IRS watching so closely, it’s vital to keep accurate records so you can report all gains and losses properly and substantiate transactions if you are audited.

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