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IRS pushes back on cryptocurrency investments

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This article was originally published by Investopedia.

When it comes to cryptocurrencies and taxation, it's all a matter of perspective. For the IRS, clients investing in cryptocurrency should be paying taxes on those investments.

The regulator says it will require that cryptocurrency investors pay taxes beyond those required when they cash out their digital holdings for fiat currencies. Items purchased using a digital currency could now be taxable as capital gains — including the purchase of other digital currencies.

In fact, clients may be unaware that when they use bitcoin to purchase other digital currencies — as is commonly the practice for many leading exchanges — these transactions themselves become taxable, according to bitcoin.com.

Beyond cryptocurrency-to-cryptocurrency purchases, which are typically relegated to digital exchanges, the use of a digital currency to buy physical items is also taxable in the same way. That is to say, physical purchases made are not subjected to the standard sales tax. Instead, digital currencies are considered to be property, in and of themselves, and have further tax liabilities.

What's more, digital currency brokers are not required by law to issue 1099 forms. Clients must calculate and report their profits on their own or face possible tax evasion charges.

Investing in digital currencies is highly risky and speculative, so make sure clients know what they’re getting into before taking the plunge.