Virtual Assets & Crypto Exchanges: Do You Need It & How It Works

Here’s how you can determine if virtual assets are for you and learn about the tax implications virtual assets bring.

Cryptocurrency is making rounds around the world right now due to its inherent security, lower transaction fees, easy access and use, universal recognition, and zero interference from the banking systems. 

This sudden hype and fad around cryptocurrency have pushed many businesses and individuals alike to invest and trade with virtual currencies. And there are so many crypto options to choose from.

It is essential to understand that these virtual assets are a digital representation of value. To be more prominent, virtual assets are “virtual properties” that can be purchased and sold like regular “real” assets.

Even the IRS treats your virtual assets like physical properties. And just like a physical asset, such as a house, car, land, or gold, virtual assets can be used for investment and trading purposes.

However, the IRS advises virtual traders to “trade consciously” since there is an intangible risk involved in virtual assets.

According to the Financial Task Action Force, virtual assets are a loophole for money launderers and terrorists to organize and fund terror activities and regimes. At the moment, there is no special framework designed around virtual assets. So, the risk of transacting with a potential money launderer or a terrorist is really high.

Plus, transacting with an unverified virtual asset provider could lead to the IRS and federal forces assessing penalties on you or your business for violating national security protocols.

And if you do not report the profits and gains you make through these virtual assets, the repercussions are gut-wrenching.   

Defining Virtual Assets

Virtual assets are digital properties that can be purchased with virtual currencies, such as Bitcoin, Dogecoin, and more. Fundamentally, blockchain technology allows traders to buy and sell virtual assets for a representative value. Similar to mutual funds, virtual assets are subject to market and regulatory risks.

Determining Risks

Virtual assets can be purchased by anyone from across the world. All they have to do is register themselves with an intermediary trading medium, such as Binance or Bisq, depending on the stakes on which the trader is willing to spend. 

All virtual assets bring in a certain amount of risk because anyone from anywhere across the world can engage in crypto exchanges. Although the transactions can be traced according to the geographical location tracking system, the primary user who actually engaged in the exchange is hard to identify due to the inherent security barriers. 

AML enthusiasts recommend integrating an authorized identity validation system before allotting trading accounts to users. This will help the federal organizations track the transaction, interpret the nature of the transaction, and monitor the amount involved in the transaction. 

Fundamentally, systemic regulatory practices allow businesses, traders, and virtual asset providers to engage in legal and tax-compliant crypto exchanges.

Understanding The Tax Implications On Virtual Assets  

The IRS requires taxpayers to report all virtual asset purchases as capital asset purchases and report any gains or losses made in a tax year. Businesses or virtual asset providers that base their business on crypto exchanges and virtual asset trading have to further pay attention to the reporting accuracies.

Virtual assets are treated as capital assets, and this means that all losses or gains made on such an asset have to be reported to the IRS. Evading taxes, hiding your virtual assets, and misreporting your virtual profits and gains can result in severe assessments exercised by the IRS. 

IRS-Approved eFile providers, such as Tax1099 allow you to import all your trading data, validate the tax information and transaction details, and e-file the returns securely. Learn more about Tax1099 here

Integrating Compliant Tax Regimes To Overcome Regulatory Risks

In order to ensure tax compliance for your virtual asset business, you cannot help but integrate certain legitimate tax practices, which help you identify, record, track, validate, and verify the details of every transaction, resulting in reporting accuracies and compliance.

The following practices help ensure regulatory and tax compliance for your business. 

  1. Streamline your customer-onboarding process 
  2. Identify your customers, vendors, third parties, and intermediaries
  3. Obtain the TIN/name details of the trader(s) during the preliminary phase 
  4. Validate the tax information & document the details 
  5.  Record every transaction throughout the year and document every transaction along with the sources

These practices allow you to monitor your transactions and avoid risk-oriented ordeals, protecting your business from possible money laundering and related non-compliant regimes.

Learn more about Tax1099’s Cryptocurrency Tax Software.

Related Cryptocurrency Blog Posts

Cryptocurrency And The Future Of Digital Compliance Automation

The Best Way To Manage Your Virtual Assets & Comply With The IRS

How IRS Defines Cryptocurrency & Tips To Report Your Virtual Assets To Stay Compliant

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