Hindsight is 20/20, but when money is on the line, being prepared can give investors better foresight. Just over a year and a half ago, Investopedia reported on the panic among many crypto investors who’d found themselves on the wrong side of the taxman. The article read, “Online forums like Reddit are abuzz with posts citing possible scenarios by worried investors about pending tax liabilities for their past dealings in cryptocoins, which may now leave them poorer.”
As Bitcoin’s (BTC) price soars and investors flock to crypto to cash in, legislators and regulators around the world are taking notice. Most recently, the Organisation for Economic Co-operation and Development announced a plan to release a ubiquitous tax standard for its member states, partly intended to curb base erosion and profit shifting. Although announcements like these serve as positive signs of intergovernmental collaboration, economic unity and progress, to the average investor, they feel rather distant. Yet it is crucial for investors in the United States to understand the digital asset tax regulations because, in some cases, it may mean the difference between prosperity and five years in prison with fines up to $250,000.
A handful of libertarian, crypto torchbearers might be inclined to believe that the built-in anonymity privileges of blockchain may save them from government scrutiny, but after all, the Internal Revenue Service isn’t quick to let go of these matters.
The U.S. tax code and crypto
Digital currencies and tokenized assets tend to be a mixed bag under the U.S. tax code. Many investors think of Bitcoin as a digital currency, like fiat currencies used regularly by consumers to buy goods. However, under the U.S. tax code, Bitcoin is actually considered “property” and is taxed under capital gains tax when either sold or used to purchase items or transferred for other digital currencies,…