Commonly, miners will received a steady income from their ventures. It could be a lot of Ether, or very little depending on how large the mining operation is. Either way, the Ether in your online Ethereum wallet will need to be taxed, or at least reported.
In fact, cryptocurrency is regarded as money or property by most governments.
When do I Report Ethereum Income
You can report your return on Ether as soon as you realize it. This means exchanging the currency from your online wallet back into dollars. Interestingly, you can avoid paying taxes if you never realize your returns on Ethereum.
Basically, gain or loss is computed by taking the sales price of each bitcoin and subtracting its cost. The technical terms are “amount realized” and “basis.” Although simple in concept, determining amount realized and basis can be quite complex, as we’ll see below.
The only way to report your gains in your Ethereum wallet properly is to calculate them. Take out that calculator of yours. We’re going to show you how to do the math.
First, find your total cost. This is done by summing all the costs of individual Bitcoin amounts. Write this number down. We’re going to be using first in first out FIFO. There do exist many techniques like LIFO. But the other methods are not recommended unless your attorney approved of such a method.
Secondly, find your current Ethereum balance, in USD. Or in whatever currency your country uses. Write this number down too. Finally, find the difference of those two numbers, known as the gain. This is what you’ll need to report on your taxes.
Okay, so you made a sale with Ethereum. Great. The market value is going to be your cost basis to be reported. Applications like Coinbase can often help merchants receive payments easily, and give the market price at the time of sale.
Bitcoin is not Ethereum
If you think all coins are handled the same, you’re probably wrong. The truth is, the matter is very unclear. What happens if you trade your BTC to Ether and put it in your online Ethereum wallet? The government is quite unclear on this. Bitcoin and alternative cryptocurrency are unlikely to qualify for similar treatment. This means that there is a possibility that your Ether may not be taxed, though it is recommended that you should report everything. After all, the last thing anyone needs is the IRS to audit them.
What if I don’t Report Gains on Cryptos
Interestingly, many people may successfully avoid an audit. The risk however, may be high. The IRS is serious about tax evasion. If someone else informs the IRS about a Bitcoin transaction related to you, you’ll be screwed if yours isn’t reported. Indeed, most exchange’s willingly hand over all user data to the IRS, putting you in a vulnerable position.
If you transfer a large amount of money over $10k from your wallet, your bank has a high chance of reviewing and possibly reporting it as a suspicious transaction. It is called SAR. Even for transactions below ten thousand, your bank could suspect you’re using the funds for suspicious activity.
Remember to report your income. Jealous friends and distant relatives can experience feelings of jealousy and resentment if you gain success. People are often reported to the IRS, which effectively destroys your gains as fines are quite high.