Crypto is Taxable…

Crypto

Yes, Report your Crypto…

Helpful Information. Yes, your crypto is taxable. Cryptocurrency has gained incredible popularity in the past few years, with many people investing in it and businesses accepting crypto as payments. But one question seems to be unanswered for many crypto buyers, sellers, miners, and users. Are cryptocurrency transactions taxable? Well, the answer to this is – yes, at least in the U.S. The Federal Internal Revenue Service (IRS) of the U.S. has clearly defined what virtual currency is and has acknowledged Bitcoin as an example of virtual currency that can be exchanged into U.S. dollars. But along with this, the IRS also states the tax consequences of dealing in virtual or cryptocurrency.

The IRS issued a Notice 2014-21 offering Income Tax Preparation guidance on the tax treatment of cryptocurrency transactions for individuals and businesses.

Why is cryptocurrency taxable in the U.S.?

The reason why cryptocurrency is taxable like real currency is that the IRS defines crypto or virtual currency as a digital representation of the value in real currency. It can be used as a medium of exchange. It can also function like a unit of account as well as a store of value, similar to real currency. Cryptocurrency is not considered legal tender in any of the jurisdictions throughout the country, but it still operates like the coin and paper currency in the U.S. does.

Owing to the fact that convertible cryptocurrencies like Bitcoin can be exchanged, traded, or sold to earn real money, crypto is treated as property for all Federal tax purposes. So, all the Taxes that apply to property transactions also apply to cryptocurrency. This is similar to Taxes levied on the income you earn from selling vintage artifacts or coin collections, for instance.

What types of cryptocurrency transactions are taxable?

Your cryptocurrency transactions may be taxable under various situations. These include –

  • Mining Crypto in any fashion is Taxable as a business
  • Then Selling crypto mined by yourself to someone is another Taxable event (capital gains)
  • Selling of cryptocurrency, bought from someone to a third party
  • Buying goods or services with cryptocurrency mined by you
  • Buying goods or services with crypto you have bought from someone
  • Exchanging one crypto for another crypto

All of these transactions are considered capital gains and are taxable under the general Tax rules. In the case of cryptocurrency that you have mined yourself, the gains will be taxed as personal or business income. This means the expenses borne by you for mining the crypto will be deducted from the income to calculate the taxable income. But in this case, the mining has to be a trade or self-employment. It won’t apply if you mine cryptocurrency as an employee.

How to ensure compliance with cryptocurrency tax rules?

Like all other Taxes, you will be subject to penalties if you do not adhere to the cryptocurrency tax laws that the IRS has made public in 2014. So, it is important to keep track of your cryptocurrency transactions and report your income when filing your tax Returns. To ensure compliance with tax rules, it is advisable that you keep records.

You must keep records of the fair market value of the virtual currency you mined, sold, used, or traded. The value for Crypto keeps changing every second. So, it is important to record the fair market value when you mine/buy a cryptocurrency and again when you sell it/use it for purchases.

Tax reporting for cryptocurrency transactions

Tax reporting for cryptocurrency transactions is treated the same way in the U.S. as Tax reporting for property transactions. A payment that you make in cryptocurrency is also subject to information reporting. Take a minute and read our information on tax software to track basis.

Furthermore, there are important forms that you will need for reporting Taxes on your crypto transactions are the following.

Form 8949

The IRS Form 8949 is used for reporting capital gains and losses from your investments. If you have any capital gains or losses from cryptocurrency transactions, the information to be filled in this form can be gathered from your transaction reports provided by various crypto exchanges.

Form 1040 (Schedule D)

The IRS Form 1040 or Schedule D, as it is also called, is for reporting the summary of all your capital gains and losses. Since 2019, the IRS has started including a question on cryptocurrency transactions during a Tax year. So, you need to make sure you declare your transactions here as well.

Form 1099

IRS Form 1099 has several versions. Form 1099-B is for reporting your proceeds from broker exchanges. In the case of stocks, your brokers would themselves send you the Form 1099-B showing the details of your transaction. With cryptocurrency exchanges, this has not been the case in the past, but the IRS will require it in the future for crypto transactions.

Form 1099-K is required if you cross a threshold limit of transactions beyond $20,000 in payments and 200 transactions in a year. This may not be very relevant to cryptocurrency though, as you would hardly have 200 crypto transactions in a year.

Form 1099-MISC is for reporting any payments made in your trade/business, excluding those made to employees or as compensation to non-employees.

Yes, Crypto is Taxable

You must report any crypto activity on your Tax Returns. Cryptocurrency may still not have gained the stature of legal tender, but in the Federal U.S., your income from crypto is still considered taxable income. As a taxpayer, you are responsible for reporting all your cryptocurrency gains next season. The primary reason why many crypto users and traders end up paying huge amounts in penalties is that they are unaware of their Tax liabilities. Now that you know, you will be able to make better decisions and ensure compliance with your Taxes.

 

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