How is cryptocurrency taxed?
Transactions of virtual currencies are taxable under the statute, much as every other kind of property. Digital currency trades may be required to be reported on tax returns by taxpayers.
Cryptocurrency is a type of digital money that is decentralized and built on blockchain technology. Bitcoin and Ethereum are the most common, but there are over 5,000 different cryptocurrencies in circulation. It functions as “real” money in some situations, but it has no legal tender status in any jurisdiction.
The first cryptocurrency, Bitcoin, was released in 2009. Thousands of others, such as Bitcoin Cash, Litecoin, Ripple, and Dogecoin, are in use today.
Digital currency with a real-world counterpart or serves as a replacement for real-world currency is known as “convertible” virtual currency. One example of a convertible virtual currency is Bitcoin. Bitcoin can be bought for, or exchanged for, US dollars, Euros, and other physical or virtual currencies, and it can be digitally transferred between users.
What Are Cryptocurrency Taxes and How Should They Work?
Cryptocurrencies like Bitcoin and Ethereum are subject to capital gains tax laws. When bitcoin is traded for a fee, the Internal Revenue Service (IRS) considers it a capital asset and taxes it accordingly. This indicates that if the cryptocurrency you use to buy products or services has appreciated what you paid for it, you would owe capital gains taxes.
If the value of your cryptocurrency plummeted and you sold it for cash, traded it for another cryptocurrency, or used it to purchase a property, you suffered a capital loss. You still don’t have to pay taxes on capital losses. In fairness, you might be entitled to exclude capital gains from other taxes.
Keep close monitoring of your cryptocurrency operation to ensure you remain on the right side of the law.
You’ll need records of your bitcoin’s fair market value when you mined or purchased it, as well as records of its fair market value when you used or sold it. This data will assist you in calculating your cryptocurrency taxes.
If you make more than $20,000 in purchases and 200 transactions in a year, you may submit a Form 1099-K. However, all requirements must be fulfilled, and many users are unlikely to use bitcoin 200 times a year. Regardless of whether you exceed these limits or not, you would pay tax on your gains.
How Much Do I Owe in Cryptocurrency Taxes?
The amount of cryptocurrency taxes you owe is determined by your taxable salary and the length of time you’ve kept the cryptocurrency.
If you own the cryptocurrency for longer than a year before spending or selling them, all proceeds will be classified as short-term capital gains and will be charged at the regular income tax rate. If you’ve had crypto for a year or so, your profits are long-term capital gains, which are charged at a reduced rate based on your average salary.
It qualifies as daily taxable income whether you gain cryptocurrency by mining it or collecting it as a promotion or reimbursement for products or services. You owe tax on the whole amount of the cryptocurrency at the average income tax rate on the day you got it. Whether you earn cryptocurrency as a result of these actions and then invest or exchange it for more than it was worth when you first got it, you will owe short- or long-term capital gains taxes, depending on how long you keep it.
How to File Your Cryptocurrency Taxes
1. Maintain detailed records of all transactions
Keep records of all your cryptocurrency trades, like how much you pay for it, how long you kept it, and how much you exchanged it for, as well as receipts for each one.
Suppose you trade cryptocurrency on an exchange or investing website. In that case, it can assist you with bookkeeping by supplying all of the information you need to file your crypto taxes yourself or with the assistance of a professional.
2. Keep track of your cryptocurrency transactions
Software firms can check the blockchain for payments between your wallets, whether on an exchange or not, and provide you with records of any transactions linked to the wallets you send it within a given tax year.
3. Fill Out the Right Tax Forms
You’ll need to fill out some tax forms based on how you spent your cryptocurrency. Forms you might need to fill out:
Form 8949: This form keeps track of every time you buy or sell cryptocurrency as an investment.
Schedule D: This form calculates the net capital gains and losses on all of your investments, like cryptocurrency.
Schedule C: If you earned cryptocurrency as a result of mining, you must state whether you received them for a company or a hobby.
4. Filling out your taxes with the help of a professional
Getting ready for cryptocurrency taxes can be difficult, particularly since the laws governing them are constantly changing. If you’ve made a significant amount of money from blockchain, it’s worth hiring a specialist accountant who specializes in this kind of tax work, so the IRS doesn’t come after you later.
If you need help filling out your taxes or needing more information about Payroll, give us a call. We are here to help.