Many new types of currencies are now found in the investment market worldwide. Earlier, consumers only had cash and credit when transacting in the currency market. These days, consumers can easily pay through multiple methods. This guide explains CPA’s guide on managing cryptocurrency and blockchain taxation.
Hiring the professional services of a CPA in Wichita, KS is an effective method of managing cryptocurrency and blockchain taxation. This blog lists all the different types of cryptocurrencies used in different transactions.
What is a blockchain?
Understanding this term properly is necessary to understand how it works in the system. Blockchain is the network of all the computers worldwide that record transactions. It is a public database stored on various computers worldwide.
All blockchain transactions are protected with a private and public key. The private key is used by the cryptocurrency owner, while the public key can decrypt the data. The blockchain network includes a digital signature to verify the authenticity of every transaction.
The block shows all the transaction information on the blockchain technology. Each block must exist to finish all the transactions.
Taxation on cryptocurrencies
Cryptocurrencies come in different kinds, such as Ethereum, Bitcoin, and Litecoin. These cryptocurrencies are regarded as property for tax purposes in the United States. They are included under the standard capital gains or the categories of ordinary income. The consumers have to report certain cryptocurrency taxable events such as:
- When consumers earn cryptocurrency as a referral reward or income
- When consumers trade in one currency to gain another kind of cryptocurrency
- When consumers spend cryptocurrency to buy goods and services
- When consumers trade crypto for traditional currency
Cryptocurrency events which are not taxable
The following cryptocurrency events are not taxable:
- When a consumer buys and holds a cryptocurrency like Bitcoin or Ethereum
- When consumers invest funds in an ICO or the option of an initial coin offering
- When the consumers transfer cryptocurrency from 1 wallet to another that the same individual owns, it is non-taxable.
How do CPAs calculate the cryptocurrency taxes?
Most CPAs calculate capital gains and losses using the fair market value and cost basis. The cost basis is the amount used to buy the property, including other costs related to cryptocurrency purchases. This is a common formula many accountants and CPAs use to calculate cryptocurrency taxes.
Different types of cryptocurrencies to know
Cryptocurrency is a virtual form of exchange used today by many consumers. It is virtual money used to buy and sell virtual assets. The different kinds of cryptocurrencies are stated as follows:
Bitcoin
A group of individuals, using the term Satoshi Nakamoto, invented this cryptocurrency. Until today, Bitcoin has been the most famous and preferred cryptocurrency. Since 2009, Bitcoin has been a well-known and popular cryptocurrency.
Ripple
Ripple, or XRP, was invented in 2012 to speed up money transfers. Consumers can use Ripple or XRP to transfer money in several transactions.
Ethereum
Ethereum is another popular cryptocurrency invented in 2015. It is the second most popular cryptocurrency with a huge market capitalization. Ethereum is a famous platform for building many decentralized apps or dApps.
Litecoin
Charlie Lee discovered Litecoin in 2011. It has a different hashing algorithm and provides speedy transaction confirmation times.
CPAs play an important role in calculating the taxation of cryptocurrency and blockchain. They must understand blockchain technology properly to evaluate tax rates. The rise of blockchain technology will make the accounting field more flexible and capable in the future.
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