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In the United States, the Inland Revenue Service (IRS) does not accept Bitcoin, Ripple or Ethereum for taxes yet. But it may not be too far away, with Arizona becoming the first state in the country to accept payments in crypto and other states likely to follow. When it is enacted, the Senate Bill of Arizona 1091 will pay Bitcoin income taxes and other cryptocurrencies that are approved by the Arizona Department of Revenue. Changes will not take effect until 2020, which appears to be light years away

The tax authorities would be required to convert these payments into dollars at the prevailing rate. It makes sense since the tax obligations are in dollars. Taxpayers would be credited with the amount converted into dollars. Any price change that would cause the state not to receive full payment would be the responsibility of the taxpayer – so the timing is relatively high.

However, what few people seem to notice is the taxability of paying in cryptocurrencies. After all, rightly or wrongly, the position of the IRS is that cryptocurrency is a property, not a currency. This fact has big tax implications.

For example, say you owe $ 5,000 in taxes. You could pay the $ 5,000 in dollars. Or soon, you could pay $ 5,000 worth of Bitcoin, Ripple, or Ethereum. Until here everything is fine. As long as crypto is worth $ 5,000 when you pay, you're free at home, right?

Not really. After all, you must consider the sale you just made. Yes, the transfer of crypto to the tax office is itself a sale, and this could mean more taxes are payable for the year of payment. If you bought crypto for $ 5,000 the day you pay your taxes, there is no gain. But suppose you bought crypto a year ago for $ 1,000, and you paid $ 5,000 to pay taxes?

That's right, and you win $ 4,000. Hopefully, it will be a long-term capital gain, which will reduce taxes, but you still have to pay taxes. You could also have a tax loss if you had bought the crypto for $ 7,000 and you transferred it for $ 5,000.

Of course, taxes are only taxed. a type of transfer. All kinds of cryptocurrencies transfers can trigger tax problems. Salaries paid to employees who use virtual currency are subject to federal tax withholding and payroll taxes.

But if you pay someone in a property, how do you withhold taxes? You can not pay a Bitcoin employee, and send some of the retained Bitcoin to the IRS (well, not yet). You must send the IRS dollars. You pay the employee a sum of money and some crypto, and withhold more money. Or, you can sell some of the cryptocurrency to get dollars to pay the IRS.

Payments using virtual currency made to independent contractors are also taxable. The recipient's income is measured by the market value at the time of receipt. In addition, as with other payments to independent contractors, taxpayers engaged in the business must issue IRS Forms 1099.

You may not enter "1000 Bitcoin" on IRS Forms 1099. You must evaluate the payment in dollars, as of the moment of the payment. A payment made in virtual currency is subject to Form 1099, like any other payment made on the property.

Many people seem to assume that all gains with cryptocurrencies are capital gains. If you hold it for more than a year, the best deal is the long term capital gain treatment. In reality, the gain or the loss of the sale or exchange of virtual money depends on the question of whether the virtual currency is an asset in your hands.

Most people can probably say that they invest in cryptocurrency. someone who uses it in his business or his business. But it's worth considering how you label yourself as ordinary income vs. long-term capital gain treatment can make a big difference. You may have to pay only 15 percent on the long-term capital gain. But the best long-term capital gains rates are 20%, plus the ability to pay 3.8% net income tax under Obamacare.

Fluctuations in cryptocurrencies have been amazing and count in many ways. It is clear that this problem is not limited to tax payments in cryptocurrencies. With almost any payment you make to anyone, this could be very important. Whenever you transfer a cryptocurrency, you could trigger a gain or loss.

The tax base and the holding period are also important considerations, and the determination of gains and losses can be staggering. What is the fair market value of digital currency? If it is publicly traded and the exchange rate is established by the supply and demand of the market, convert it to US dollars at the exchange rate.

Remember that if you receive virtual currency, fair market value of income. Report the fair market value in US dollars at the date of receipt. If you sell it afterwards, on what basis is the virtual currency received as payment for goods or services? Fair market value in US dollars at the reception.

If you operate a virtual currency, you have a mining income and the fair market value is income. Is the extraction of virtual currency considered a commercial activity or an activity that subjects you to the tax on self-employment? Regardless of the answer, the IRS gets pretty much everything.

Soon, however, Arizona could take center stage as the first state to begin accepting crypto in payment of tax obligations. It's a positive development and can encourage other states – maybe even the IRS – to follow suit. Just remember to consider your base and retention period, and keep good records.

The views and interpretations in this article are those of the author and do not necessarily represent the views of Cointelegraph. com

Robert W. Wood is a tax lawyer representing clients around the world from the offices of Wood LLP , in San Francisco (www.WoodLLP.com). He is the author of many tax books, and writes frequently on taxes for Forbes.com, Tax Notes, and other publications. This discussion should not be considered as legal advice.

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