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 cost 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 Tax 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.