Cryptocurrency tax myths may confuse investors and can get them into trouble with the IRS

With the evolution of disruptive technologies, the laws regarding cryptocurrency are evolving quite rapidly, but one fact that surfaced in 2014 and kind of disturbs the investors is the fact that cryptocurrencies are taxable. Even though tax regulations are applicable in some of the countries, in other countries, the regulations pertaining to taxation on crypto profits and transaction is still obscure. The mystery and speculation behind cryptocurrencies and the taxation framework have led to the spread of some dangerous misconceptions that could land cryptocurrency holders in some serious trouble with the IRS. The United States Internal Revenue Service (IRS) previously laid out some regulations regarding the taxes and financial frameworks regarding the use of digital assets, but there are many cryptocurrency tax myths that reveal that the IRS cannot track malpractitioners. Well coming to such cryptocurrency tax myths, there are several such myths pertaining to crypto taxes that enthusiasts who are willing to step into the crypto market should know. It might to too harmful for them to surround themselves with misinformation regarding the digital asset space. 

Over the years of crypto development, major digital assets like Bitcoin and Ethereum have witnessed exponential growth in transactions. But it was not long before governments observed a surge in money laundering using cryptocurrency. But today, cryptocurrency transactions are quite transparent, but the presence of these cryptocurrency tax myths is making facts obscure. Let's dive in to debunk some of the most popular cryptocurrency tax myths that investors should know about.

Some Popular Cryptocurrency Tax Myths

Firstly, there are several investors who perceive that crypto compensation is not taxable. This is quite a misconception. If investors receive payment for their goods and services in the form of cryptocurrencies, the IRS considers the income equivalent to cash compensation, whether they are operating as an employee or independent contractor. As a result, the standard income tax rules apply, and they will have to include the Fair Market Value (FMV) of the cryptocurrency on the date they received the gross income. Coming to IRS, there is an age-old misconception regarding the fact that the IRS cannot track crypto investors since they are anonymous in nature, but the fact is the IRS can find you if they are willing enough to get to you. Even though cryptos like Bitcoin are hard to track, it is quite evident by now that it is not impossible to track. The currency is only pseudo-anonymous. The IRS has invested millions of dollars in software designed to follow crypto transactions. E-track, the IRS's social media bloodhound, and the dark web are also being watched. 

Furthermore, there is a quite popular myth that hard forks and Airdrops are not taxed. Well, that's not true. There is no free money when it comes to the IRS, and they have made it absolutely clear that this applies to cryptocurrency. Back in 2019, the IRS issued guidance stating that airdropped units are to be included in taxpayers' gross income as their FMW. Also, another popular misconception that needs to be debunked as soon as possible is that investors are only taxed when cashing out to fiat. But no, this is actually far from the truth. In fact, there are several types of cryptocurrency transactions that are taxable, not just cashing out to fiat currency. crypto-to-crypto swaps, staking rewards, mining and airdrops are all examples of taxable events within the crypto ecosystem that do not involve cashing out to fiat.

Bottom Line

The most important point that all investors should follow is to treat their cryptocurrencies as property and to assume that the IRS will tax them more often than not. But if handling cryptocurrency taxations becomes too challenging, then they should choose an authentic and professional consultant who can advise them to make the big decisions that may impact the taxes.