Cryptocurrencies like Bitcoin have been around for more than a decade. With massive gains and market adjustments in recent years, cryptocurrencies have started to go mainstream. Bitcoin, Ethereum and Litecoin are all known brands of digital currency, but there are many more. Now that PayPal and even Visa have announced they will start allowing cryptocurrency transactions, even more people and investment groups will be clamoring to get on the cryptocurrency train.
Those who invested early in successful cryptocurrencies will likely have earned money on their investment at this point. The same goes for those who bought into various cryptocurrencies when the market slumped and those who have made a career of helping to create units of cryptocurrency.
While cryptocurrency is a secure and mostly private resource intended for anonymous and safe online use, you still have a legal obligation to pay taxes on your earnings from cryptocurrency investments or production.
The IRS knows all about cryptocurrency
In the first few years when people decided to invest in Bitcoin and similar products, there were no regulations at the federal level regarding income earned through cryptocurrency transactions. That has changed.
The IRS now expects those with cryptocurrency holdings to report their income earned from those investments. If you fail to disclose your cryptocurrency holdings, the IRS could potentially come after you for past-due taxes. That means not only will you owe the initial tax amount but also penalties and interest.
What cryptocurrency income is taxable?
Most people who will have to pay tax on cryptocurrency will pay taxes based on its sale. If the cryptocurrency you hold increases in value and you liquidate it, you will have to pay tax on the difference between what you initially invested and what you withdrew. If you help generate cryptocurrency, a process sometimes known as mining, you will have to pay for the value of the unit of cryptocurrency at the time that you produce it.
If you didn’t know that you had tax liabilities for your cryptocurrency earnings, you may have underpaid your taxes. If the IRS finds out, you could face an audit or even criminal charges due to unpaid tax balances.