Cryptocurrency. Bitcoin. Blockchain. These words may inspire excitement and enthusiasm in some –wariness and confusion in others. The rise of blockchain technology and cryptocurrency as a form of investment and tender has created quite the buzz in recent years. Steep market rises and falls for digital currencies, such as Bitcoin, Ethereum and Ripple, have casual and serious investors alike buying, selling and using these currencies to purchase goods.
Are cryptocurrencies right for you? While we can’t answer that question outright, we can offer some advice on what to be aware of when dealing with cryptocurrencies:
1. The IRS is very focused on accounting for cryptocurrencies and capturing tax on gains
a. Every time you transact using cryptocurrency, you will have a gain or loss on the transaction
b. Gains will be taxable, but losses may not be deductible
c. Gains and losses may be dependent on whether you are buying and selling as an investment or using as currency to purchase goods
d. Digital currency is treated similarly to Foreign Currency by the IRS
e. The IRS is actively investigating and tracking the buying and selling of digital currencies, so don’t make the mistake of not reporting
2. There is clearly volatility in the market, so investors need to be educated and aware of the both the benefits and risks involved
3. There are new “coins” hitting the market every day. Not every one is a winner. Some have proven to be scams likened to Ponzi schemes. Caution and vetting is advised.
4. The accounting for currencies like Bitcoin, Ethereum, etc. can be complex. Make sure you are working with a CPA, Financial Advisor or other individual that understands how they need to be tracked and how to determine value, gains and losses.
Bumpers & Company has exposure to and experience with accounting for cryptocurrencies. We are happy to help you address concerns and understand how to report your digital transactions and investment activities. Call us anytime to learn more.