Crypto Currency Taxes
Crypto Currency Tax Guide- No More Fines!
If you have been investing in cryptocurrency, it’s important to report your gains and losses for your Crypto Currency Taxes to the IRS. That way, you don’t get fined for not reporting them. But unfortunately, the IRS is cracking down on people who do not report their crypto transactions. Also for those taxpayers that just ignore the law altogether!
What are Crypto Currency Taxes?
Crypto currency Taxes refers to the process of reporting income or gains from cryptocurrency trading on a Federal level. The IRS has made it clear that they expect investors who have transactions in cryptocurrencies like Bitcoin and Ether (Ethereum) will report their transactions by April 15 each year.
How do I Report Crypto Currency Taxes?
If you have sold any amount of cryptos for more than $20 during 2021, then you are legally required to pay taxes on capital gains. This means if someone paid $100 for one bitcoin last year and sold it (or bought something) for $130, this person would be obligated by law to report the $30 gain on their income tax returns. Here is a breakdown of what you need: Tax Identification Number (TIN) and Schedules for Capital Gains and Losses.
A Step-By-Step Guide To Filing Your Crypto Currency Taxes:
1) Gathering All Your Transaction Records:
To accurately report your crypto transactions, you’ll need to have records of all the buys, sells, and exchanges that occurred during the year. This includes the date of the transaction, the amount involved, and what type of crypto was used. Then, you can use a software program or an online calculator to help you figure out your gains and losses for each transaction.
2) Determining Your Taxable Income:
Once you have all your transaction records, it’s time to figure out your taxable income. This is the amount of money you make from trading, mining, or spending crypto during the year. To determine your taxable income, simply add up all your gains and subtract your losses.
If you incurred a net loss for the year, you could use that to offset any taxable gains you may have had. For example, if you made $2000 in profits but had a net loss of $1000, your taxable gain would be $1000.
3) Reporting Your Crypto Transactions:
Now that you know your taxable income, it’s time to report these assets on your taxes. The first thing you’ll need to do is figure out the cost basis of each transaction by adding up all your purchases and subtracting any sales or exchanges. For example, if you purchased $1000 worth of crypto coins in January 2021 but sold them for $1200 a month later, then use this formula: ($1200 – 1000) = $200). This tells us that our cost basis is $1000 at the end of February (when we made the sale.) To determine how much capital gain/loss you have from selling an asset like Bitcoin or Ethereum, simply take the current value of what was once your cost basis and subtract it from the proceeds of the sale. So, in our example, ($1200-$1000 = $200).
You’ll then use this information to report your transactions on IRS Form 8949. This is where you list each transaction along with its date, type of crypto, amount, and gain or loss. You will also need to include this form with your tax return.
4) Filing Your Crypto Taxes:
Now that you have reported all your transactions, it’s time to file your taxes. You will need to submit IRS Form 8949 with your return, as well as Schedule D (if you had any capital gains or losses). Be sure to check the instructions for these forms carefully, as they can be a little confusing.
Here Are Some More Helpful Tips on Filing Your Crypto Taxes:
- You need to report even small transactions; report those that result in a gain or loss need to be declared
- Make sure you have records of all your transactions, including dates, amounts, and the type of crypto involved
- You can use a software program or online calculator to help you figure out your gains and losses
- If you’re feeling overwhelmed, don’t hesitate to get professional help!
What Do You Need to Know About Filing Taxes When Dealing with Cryptocurrency?
- You need to declare any profits you make from trading, mining, or spending crypto.
- If you use a coin like Bitcoin to purchase goods or services, you need to declare that Bitcoin’s value at the time of purchase.
- Any losses you incur can be used to offset your taxable gains.
If you did not report your crypto transactions in the past now is the time to get it cleaned up before you get audited or investigated by the IRS. You can bet the IRS is building a system to track your transactions. Of course, they will be issuing fines to those who do not comply with the law, but if you get in touch with a tax accountant right away, there is still time for them to help you out of this situation!
If you’re not sure how to report your crypto gains, be sure to consult a tax professional! They can guide you through the process and make sure that you comply with the law. However, fines for not reporting crypto transactions can be costly, so it’s best to avoid them altogether by following these simple steps.
What if I’ve Never Sold Cryptocurrency?
If you have acquired Crypto and are just holding it you are off the hook! If your crypto investment portfolio has gone up significantly in value and you haven’t sold it, then it’s likely that you have not occurred a taxable event. This means as long as you haven’t had a transaction you avoid a taxable event. You should still keep track of how much money they were worth when purchased so when you do sell them when April 15 comes around, you will be able to figure out exactly how much profit you have made.
What about Buying Cryptocurrency?
If you bought cryptocurrencies last year, the rules are a little different. In this case, your purchase is considered an investment, and an increase in value would be taxed as capital gains when you sell them. Though it is difficult to understand crypto’s fair market value. This also applies if you use cryptocurrency to buy goods or services- the IRS considers this a taxable event.
When to Report Cryptocurrency Trades on Your Tax Return:
You must report your capital gains and losses for each transaction that occurred during the tax year.
Cryptocurrency as income:
If you receive cryptocurrency (i.e., Bitcoin) in return for goods or services, it is taxable, just like any other type of ordinary income. Therefore, you would have to report this amount on Line 21 of Form 8949. And then transfer those amounts from there over onto Schedule D.
Exchanging Cryptocurrency Back into Fiat Currency
When a person sells their coins back to fiat currency, they declare a gain/loss based upon the difference between what they received when converting crypto currencies into US dollars and what they originally paid when purchasing said cryptocurrencies with US dollars exchanges Coinbase.
Mining New Coins
Mining coins is very similar to buying them. Since you’re using your computer’s hardware and electricity, these are considered business expenses and can therefore be deducted from the amount of income you earn through mining cryptocurrency. You will have to file a Schedule C form for being self-employed. After deducting your expenses, the remaining balance will constitute a profit or loss depending upon whether it was positive income or a loss.
It’s important to note that while the IRS has yet to create any official rules regarding cryptos, they have been issuing guidance on how digital currencies should be treated for tax purposes since 2014, now IRS treating crypto as capital assets. And even in light of all this ambiguity around taxes: one thing remains certain- penalties for noncompliance remain high! So, make sure you get good at tracking down those records… before April 15 rolls around again next year!
What Crypto Currency Tax Software Should I Use?
There is no one-size-fits-all answer to this question, as the best software for you will depend on your individual needs and preferences. However, some of the most popular options include:
This app is designed to help you calculate your gains and losses from Bitcoin and other cryptocurrencies. It’s a great option for those who want to do everything themselves, as it walks you through every step of the process.
CoinTracking offers a comprehensive suite of features, including automatic imports from over 50 exchanges, detailed reports on all your transactions, and even an alert system to notify you when you’ve made a taxable transaction.
If you’re looking for something more geared towards traders than investors, CryptoTrader might be the right choice for you. It offers real-time data on prices and trades, as well as an in-depth analysis of your gains and losses. We really Like CryptoTrader.
If you’re looking for a bit of help with your taxes, Crypto Tax Prep is definitely worth considering. It’s essentially TurboTax for crypto currency users. Just enter the relevant data into their questionnaire-based system, and they will give you all the information that fits in your tax return.
What Happens if I Don’t Report on my Cryptocurrency Taxes?
Unfortunately, the penalties for not reporting your crypto currency transactions can be quite steep. The IRS can assess fines of up to $100,000 for failure to file a form 8949 and an additional $25,000 per month for continued noncompliance. So, it’s definitely in your best interest to make sure you’re compliant with all tax laws!
What’s New with Crypto Currency Taxes?
At this point, there’s still a lot of ambiguity surrounding the tax treatment of cryptocurrencies. In fact: many cryptocurrencies remain unable to be classified as either currency or property legally! This is unfortunate because it means that people will continue dealing with vague information from both the IRS and their exchange providers on reporting transactions throughout 2018; however, it gives us some clues about what we can expect for years beyond.
So here are two things you need to know regarding your cryptocurrency taxes …
The United States Congress has formed an “Ad Hoc” committee whose sole purpose is to examine digital currency taxation issues. This group was created back in 2016 but only recently started meeting (nearly a year later) in order to discuss possible approaches and solutions.
Even though Bitcoin has been around for almost ten years now, the Internal Revenue Service is still treating it as property (and not currency) when it comes to taxation. Unfortunately, this means that all transactions involving buying, selling, or trading BTC will be subject to capital gains taxes next tax season! So, make sure you report your Crypto transactions correctly!
Tax Deduction for Cryptocurrency:
You can also deduct your losses on cryptocurrency investments from your taxable income. This includes both short-term and long-term capital losses, which can be used to offset other forms of income. For example, if you have $2000 in long-term losses and $1000 in short-term gains, you can reduce your taxable income by $1000.
For tax purposes, the IRS treats cryptocurrency as property and not currency. This means a difference between short-term capital gains and long-term capital gains (see below).
Tax on Short Term Capital Gains:
A “short-term” gain or loss occurs when an asset is sold less than one year after being purchased. For example, if you bought a cryptocurrency at $1200 and sold it after one month for $1700 – that would be considered a short-term gain of $500.
Tax on Long Term Capital Gains:
A “long-term” gain or loss occurs when an asset is sold more than one year after being purchased. For example, if you bought a cryptocurrency at $1200 and sold it after two years for $1500 – that would be considered a long-term gain of $300.
When computing your capital gains tax, you will use the “long term” rates if you have held the capital asset for more than one year. This will result in a lower tax liability.