When it comes to bitcoin and other cryptocurrencies , you might find yourself owing taxes simply for spending bitcoin to pay for goods and services. Because the IRS taxes bitcoin as property , not as a currency, spending it is considered to be a capital transaction. According to the IRS's guidance on the matter, "If the fair market value of property received in exchange for virtual currency exceeds the taxpayer's adjusted basis of the virtual currency, the taxpayer has taxable gain.
Here's what this means. Conversely, if you spend bitcoin that you paid more for, you could have a loss for tax purposes. As you can probably imagine, if you use bitcoin to pay for goods and services regularly, this can get rather complicated. Especially if you bought bitcoin on various dates for different prices. But if you make any substantial purchases with appreciated bitcoin, be sure to keep track and report them.
If you mined bitcoin, you could also have a taxable gain. And this is even true if you haven't sold or spent any of the digital currency you mined. Specifically, when you mine bitcoin, its fair value on the date you mine it is considered to be taxable income. When you eventually sell or otherwise dispose of it, this is also the reference price to determine if you have a taxable gain or loss. Obviously, there are more possible situations involving bitcoin and other digital currencies than I can cover in a single article.
For example, if you mine bitcoin as your primary business, do you also have to pay self-employment tax on the value of the mined cryptocurrency? What if you run a business and a customer pays you with bitcoin, which then grows in value? The IRS has issued extensive virtual currency guidance that covers these questions and many other scenarios, so be sure to check it out if you need a specific answer.
Since bitcoin gained so much value in , you can bet the IRS will be on the lookout for money they're owed. Investing Best Accounts. Stock Market Basics. Stock Market. Industries to Invest In. Getting Started. Planning for Retirement. This is not the case yet with crypto markets.
Although there are many crypto derivatives exchanges, very few of them are regulated or would pass operational due diligence by institutional investors. In , crypto derivatives will be an area to watch. Open interest on bitcoin futures on the CME has recently been at record highs and will be a good barometer of investor appetite going forward.
This space still offers a lot of opportunities for firms that understand the institutional-grade requirements, from counterparty risk mitigation and high-speed connectivity to being regulated. That will provide great opportunities not only to existing players many of whom have been institutionalizing quite quickly but also to potential new entrants and traditional institutions. Move away, Hoodies: Here come the Suits to professionalize the industry.
Many in the first generation of crypto entrepreneurs came from tech backgrounds. But now, many of the larger crypto firms have decided to institutionalize by bringing aboard individuals with institutional financial services backgrounds to run their businesses, with numerous recent examples from crypto native firms like BitMEX to new ventures like Diem. We should expect this trend to accelerate in However, the crypto industry is a sink or swim environment.
Some will be able to adapt and be very successful in building the next bridge towards the future of money. Some months, trading volumes on certain DeFi exchanges were bigger than those at some of the large traditional exchanges. In , DeFi is likely to grow further. While it is unlikely we will see institutional investor interest in the sector, the dedicated group of folks from the crypto community working in this exciting area will continue to make breakthroughs.
Some of the features of DeFi, like composability , for example, give us an opportunity to reimagine financial services with a first-principles approach. All eyes here will be once again! Diem aims to make sending money around the world as easy as sending an email or a message on WhatsApp. While stablecoins already play a big role in crypto trading , one area to watch in is whether usage of stablecoins picks up when it comes to cross-border commercial transactions.
Data suggests usage of stablecoins is already increasing in certain corridors, such as between Latin America and Southeast Asia for example, where merchants are using stablecoins to settle transactions, completely bypassing the traditional banking rails in the process. In , it will be interesting to see if this trend continues.
And is shaping up to be even more exciting! Do you agree or disagree with the above predictions? Feel free to reach out to me on LinkedIn or Twitter. And there are no signs of the momentum slowing down in ! Here are my 10 crypto predictions for the coming year:. Subscribe to , Subscribe. China leading the CBDC and future of money race.
The taxman provides crypto tax clarity. Retail investors and my mom! Traditional hedge funds and family offices rushing into crypto. Crypto derivatives exchanges growing up. New regulations driving traffic to DeFi. Stablecoins play a bigger role in cross-border transactions. So there you have it, my top 10 crypto predictions for !
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