Crypto Taxes: How is Cryptocurrency Taxed?
If you have been investing in crypto for a while now you already might have researched a bit about cryptocurrency taxes. Earning interest on crypto is exciting until you think about having to pay taxes on it. Even though cryptocurrencies are new, the IRS is working hard on crypto tax compliance. There are various ways in which you can end up owing taxes on crypto and as a matter of fact, trading one cryptocurrency for another is taxable too. If you do not pay attention to these aspects well in advance, it can be difficult to analyze your gains and losses at the time of taxation. Moreover, if you do not pay your crypto taxes, you could end up incurring costly penalties even if you may have forgotten about it due to an honest mistake.
In this guide, we enlist everything you need to learn about taxes on crypto trading and crypto gains. Let’s take a look right away!
Is Crypto Tax a Thing?
Yes, it is! You are required to pay taxes on crypto! According to IRS, cryptocurrency is classified as a property and the crypto transactions are also taxable just like the transactions associated with any property. You need to pay taxes on crypto when you sell, trade, or dispose of cryptocurrency such that it counts as a gain.
For instance, when you buy $500 of crypto and sell it later for $1000 then you are required to report and pay the taxes on the profit of $500. On the other hand, if you dispose of cryptocurrency and recognize a loss then you can deduct that on the taxes too.
Having said that, buying crypto is not a taxable event. You can buy and hold crypto and you don’t have to pay any tax even if the value of the cryptocurrency increases.
How to Know if You Owe Crypto Taxes?
As mentioned above, you owe crypto taxes if you have used your cryptocurrencies in any way and if it has increased in value after you first brought them. Here’s when you can get taxed for cryptocurrency transactions:
- When you sell cryptocurrency for a fiat currency
- Using cryptocurrency for purchasing goods/services
- Trading different types of cryptocurrencies
In these circumstances, the value of crypto should have gone up, and only then will it be a taxable event. So in order to determine if you need to pay crypto tax, look at the cost basis which is essentially the total amount you have paid for getting that particular crypto. Then you can go ahead and compare this to the sales price or proceeds when you have used the crypto.
Here’s an example of taxable events if you have bought one Bitcoin for $25,000:
- If you sell the Bitcoin for $50,000 when the price increases and you report the gains of $25,000.
- If you used the one Bitcoin for buying a car worth $50,000 you will report $25,000 in gains.
- If you trade that one Bitcoin for $45,000 of another cryptocurrency then you will report gains of $20,000.
Taxes get complicated when there are trades between coins in place. Since a crypto trade is a taxable event, when you trade one crypto coin for another, you need to report the gains in U.S dollars on your tax return. The key to remember is to always track your gains or loss in U.S dollars so that you can easily report them. If you would wish to simplify things even more then crypto stocks are worth looking into that can help you track the gains and losses as opposed to the tracking you would do when checking to buy and selling certain coins.
How Can You Report Crypto on Taxes
The crypto gains and losses need to be reported on Form 8949. You will have to provide the following information for filling out this form. For instance, you should provide the name of the cryptocurrency, date of acquiring it, date of selling it, sales price, cost basis, and the total gain or loss incurred in this process. For each taxable event, you can report this process for the year.
How is Crypto Income Taxed?
Cryptocurrency income is taxed just like ordinary income and based on its market value on the day when a taxpayer receives it. Crypto income is when you receive crypto as a payment for providing any service. Moreover, mining cryptocurrency and staking crypto also count as crypto income. Likewise, lending crypto and receiving interest payments are also taxable.
Crypto Tax vs Stocks Tax
Cryptocurrencies are taxed just like stocks and other kinds of property. When you gain something after selling or disposing of your crypto you need to pay the taxes on the amount of the gain. If you are looking for ways to minimize the tax burden then here are some tips that will help:
- Hold crypto investments for more than a year before you sell them off or use them since tax rates on such long-term gains are lower than the short-term gains.
- If you are having gains and losses on different types of crypto then you can sell both the crypto and use the loss to offset your gains.
- You can open a crypto IRA which is a type of account that lets you make tax-deductible contributions and you can pay taxes when you withdraw the funds.
How Can You Prepare for the Tax Season if You Own Crypto
An important aspect of getting through the tax season as a crypto investor is to gain as much information as you can and hand it over to your tax professional if you have one. Moreover, throughout the year, you should keep a record of your crypto transitions and if you haven’t done so you can always get the transaction records from the crypto platform that you are using. For instance, Hodlnaut lets you easily export your statements whenever you wish to. This makes tracking all the transactions very easy.
Also, your cost basis is of particular importance when you complete your taxes so make sure that it is readily available. The tax forms you will need for virtual currencies are Form 8949 and Form 1099-B which is a broker or barter exchange that you will get from crypto platforms. With these forms, you can complete your tax return seamlessly. Do note that if you don’t have 1099 assigned by a crypto trading platform then you will still be needed to report that income.
Cryptocurrencies are also taxable and it is imperative to educate yourself on the topic so that there are no unpleasant surprises during the tax season. In this guide, we have mentioned the various conditions where you are supposed to pay crypto taxes. Needless to say, do your own research too, and always keep a track of the cryptocurrency gains that you may have so that you can report them during the tax season.
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