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 owe taxes, and you don’t get fined for not reporting them. Unfortunately, the IRS is cracking down on people who do not report their crypto transactions, and engaging in any cryptocurrency or digital asset transaction can have tax consequences. Each of these transactions has different tax implications. Also, for those taxpayers that just ignore the law altogether!
What are Crypto Currency Taxes?
Cryptocurrency 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 sell, trade, or barter any cryptocurrency amount for more than $20 during the year, you must pay taxes on capital gains, including the tax rate. For example, if someone paid $100 for one bitcoin last year and sold it (or used it to buy something) for $130, that person must report the $30 gain on their income tax returns. Here’s what you need: a Tax Identification Number (TIN) and schedules for capital gains and losses. If you are in Australia, check out the rules for crypto taxes there.
The cryptocurrency tax rate is between 0% and 37%, depending on how long you held the currency and under what circumstances you received your cryptocurrency. Ordinary income rates for cryptocurrency taxes are between 10% and 37%, depending on your income tax bracket.
Short-term capital gain rates are between 10% and 37%, depending on your income tax bracket. The tax bracket determines the specific tax rate that applies to your income. See our Crypto Story.
A Step-By-Step Guide to Filing Your Crypto Currency Taxes
Gathering All Your Transaction Records:
To accurately report your crypto cost transactions, you’ll need to have records of all the buys, sells, and other cryptocurrency exchanges made. That occurred during the year, including cryptocurrency transactions. This includes the date of the transaction and the amount involved. What type of crypto was used, and what was the original cost for acquiring your crypto? Then, you can use a software program or an online calculator to help you figure out your gains and losses for each transaction.
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. Cryptocurrency taxes can be confusing. Count on Akron Income Tax Co. to help you.
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.
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 determine the cost basis of each transaction. Add up all your purchases, including the purchase price, and subtract 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 subtract the current value of what was once your cost basis from the sale proceeds.
So, in our example, ($1200-$1000 = $200). These are only taxable events if the value-adjusted cost basis of your crypto has increased. To determine whether you owe crypto taxes, you need to know the cost basis, which is the total amount you paid to acquire your crypto, including the purchase price.
Then, you compare that to the crypto sales’ price or proceeds when you used the crypto. It is important to note that when reporting your crypto transactions, you should also consider the cryptocurrency’s fair market value at the time of the transaction. This value determines the cryptocurrency taxes from the income received following a hard fork.
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.
Filing Your Crypto Taxes:
Now that you have reported all your transactions, it’s time to file your taxes. You must submit IRS Form 8949 to track the Sales and Other Dispositions of Capital Assets with your return, as well as Schedule D (if you had any capital gains or losses). Be sure to carefully check the instructions for these forms, as they can be confusing. You may need our tax preparation services to get this completed correctly.
Here Are Some More Helpful Tips on Filing Your Crypto Taxes:
- You need to report even small transactions; 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 Crypto 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 for tax evasion 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 contact a tax accountant immediately, there is still time for them to help you out of this situation!
If you’re not sure how to report your crypto gains in the crypto industry, be sure to consult a tax professional for expert cryptocurrency tax reporting advice! They can guide you through the process and make sure that you comply with the law. However, fines for not reporting crypto transactions in the crypto industry 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 you avoid a taxable event if you haven’t had a transaction. You should keep track of how much money they were worth when purchased so that April 15 comes around when you sell them. You can figure out exactly how much tax profit you have made.
What about Buying Cryptocurrency?
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 considered taxable income, just like any other type of ordinary income. Therefore, you must 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 people sell their coins back to fiat currency, they declare a gain/loss based upon the difference between what they received when converting cryptocurrencies into US dollars. And what they originally paid when purchasing said cryptocurrencies with the US dollar from crypto exchange Coinbase.
Mining New Coins
Keep in mind that the IRS has not created official rules for cryptocurrencies yet. Since 2014, they have provided guidance on how to treat digital assets and currencies for tax purposes. Currently, the IRS views 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!
The agency provided further guidance on how cryptocurrency works. Should be reported and taxed in October 2019 for the first time since 2014. Beginning in tax year 2020, the IRS also made a change to Form 1040 and began asking. “At any time during the year, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency for federal income tax purposes?”
For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins. If a particular asset has the characteristics of a digital asset. It will be treated as a digital asset for federal income tax purposes.
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:
Bitcoin.Tax
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. https://bitcoin.tax/
CoinTracking
CoinTracking offers a comprehensive suite of features, including automatic imports from over 50 crypto exchanges and detailed reports on all your transactions. And even an alert system to notify you when you’ve made a taxable transaction. https://cointracking.info/
CoinLedger
If you’re looking for something more geared towards traders than investors, CoinLedger might be the right choice for you. It offers real-time data on prices and trades and an in-depth analysis of your gains and losses. We really Like https://coinledger.io
What Happens if I Don’t Report on my Cryptocurrency Taxes?
Unfortunately, the penalties for not reporting your cryptocurrency transactions on your tax return can be steep. The IRS can assess fines of up to $100,000 for failure to file your cryptocurrency taxes on form 8949 and an additional $25,000 per month for continued noncompliance. So, it’s definitely in your best interest to ensure you comply 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 cannot legally be classified as currency or property. 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.
Cryptocurrencies are a subset of virtual currency and are considered a digital representation of value, acting as a store of value. This means that cryptocurrencies, like Bitcoin, can serve as a medium of exchange and a unit of account. In addition to being a store of value. It also means any profits or income from your own cryptocurrency is taxable.
So here are two things you need to know regarding your cryptocurrency taxes …
First off:
The United States Congress has formed an “Ad Hoc” committee whose sole purpose is to examine digital asset and 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.
Secondly:
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 and reduce your tax burden.
For example, if you have $2000 in long-term losses and $1000 in short-term gains, you can reduce your taxable income by $1000, thereby lowering your tax burden. Any remainder carries over to subsequent years until the full amount of the loss is applied. Additionally, if you lost money in crypto, you may be able to reduce your 2022 tax burden.
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 you sell an asset less than one year after purchasing it. For example, if you buy a cryptocurrency for $1,200 and sell it after one month for $1,700, you realize a short-term gain of $500.
Tax on Long-Term Capital Gains:
A “long-term” gain or loss occurs when you sell an asset more than one year after buying it. For example, if you buy a cryptocurrency for $1,200 and sell it two years later for $1,500, you make a long-term gain of $300.
When you calculate your capital gains tax, use the “long-term” rates if you have held the asset for over one year. This will result in a lower tax liability. If you have any questions concerning crypto, please feel free to ask.
Read More