Recent developments lead many to Bitcoin mining and investing in Bitcoin as many tend to believe that it is a great start for investment. Regulators and tax specialists are now looking into cryptocurrencies and how they should be treated when it comes to income taxation.
Since there are currently no set guidelines and procedures as to how cryptocurrencies are being taxed, the recent split of Bitcoin and Bitcoin Cash has caused many investors to wonder whether profits from Bitcoin Cash will be considered “free cash” in the eyes of the taxman.
A recent report from WSJ explored the question and by the looks of it, it’s still a draw.
Bitcoin and Bitcoin Cash
Bitcoin is a cryptocurrency or what people describe as digital cash. It is a centralized ledger and is accessible by all parties involved from any parts of the world. The specifics of Bitcoin Cash is that the BCH is a new cryptocurrency initiated by miners and Blockchain developers in responses to scaling issues.
In Bitcoin network, the verification process usually takes up to 10 to 15 minutes or even longer - a lot when you compare it to debit cards. Such slow process and often network congestion lead the developers and miners to the idea that the more people are making transactions at the same time, the more its network scalability and speed will be challenged.
The mining pools agreed to integrate the technology with SegWit or the Segregated Witness.
SegWit2x makes the signature and verification data even smaller. SegWit2x, however, does not fix the problem completely.
In August, miners and developers initiated a hard fork which resulted in ‘split’ and born of a new currency called Bitcoin Cash. The latest version is claimed to have faster verification process and upgrades the blocks up to 8mb.
IRS on taxing Bitcoin Cash
Now, those who have been holding Bitcoin before the fork happened have received Bitcoin Cash equivalent to the number of Bitcoin in their wallet especially for wallets and exchanges that supported the split.
While there are currently no existing guidelines as to how Bitcoin (and now Bitcoin Cash) are treated regarding taxation, according to Bitcoin.tax, what's clear with the situation is that there are applicable income taxes whenever you sell either or both Bitcoin and Bitcoin Cash holdings.
While many Bitcoin and Bitcoin Cash may think it’s “free money,” hence not necessarily taxable, the IRS thinks otherwise. Several Reddit users chimed in the issue, with one user clarifying:
"The IRS has already stated that Bitcoin is treated like property. Mining is considered income. Hodling is the same as owning gold. A $0 cost basis means that you got capital for free, and if you sell it 100 percent is gains."
The treatment for cryptocurrencies can be at zero cost. If the owner sells his Bitcoin Cash and receives the 100 percent profit as capital gains income, it will be taxable.
Thus, the declaration should be a normal income as part of his capital gains in 1040 Schedule D. A Bitcoin Cash owner can opt to report his BCH as income and pay the tax amount required.
According to 2014-21 Notice of IRS:
"Virtual currency is treated as property for US federal tax purposes."
The principle for the General Tax for properties is also applicable to the transactions in virtual currencies.
For IRS, Bitcoin is a capital asset which is also subject to short term capital gains if sold for less than twelve months or long-term capital gains if sold within a year. IRS applies the 15 percent to 20 percent tax rates as based on income. The fair market value will be the price.
With sophisticated systems in place by the IRS, US investors, in particular, are recommended to check with their accountants and tax specializing in their specific state regulations in order to ascertain their compliance with their specific federal and state taxes and avoid getting in trouble with the taxman.