As a rule of thumb, every US citizen must pay income taxes on your cryptocurrency gains. Although some may not find it to be the most interesting component of cryptocurrency trading, if you do choose to do so, you need to be aware of how bitcoin gains are taxed.
Although cryptocurrencies are still in their infancy, the IRS is taking steps to verify their compliance with tax laws. You can owe taxes on cryptocurrencies in many ways, and even trying to trade one cryptocurrency for another is a taxable gain. If you do not maintain precise records, it may be challenging to piece together your gains or losses during tax season. Below are some important points about cryptocurrency taxes:
When must cryptocurrency taxes be paid?
You can buy and hold cryptocurrency, get paid in it, and make transactions using it in a variety of ways. Here are the lists of those who must pay cryptocurrency taxes because not all of these actions are taxable:
Earn cash through mining
Digital assets can also be obtained other than by purchasing bitcoin, therefore some people earn money by mining cryptocurrency. New coins are produced by cryptocurrency mining, which involves applying sophisticated algorithms that miners must solve using computers. Then, bitcoin is given to the miners as payment. One of the 1099 tax forms is used to report the fair market value of a crypto coin when you receive cryptocurrency through mining. A 1099 form is an information sharing form used to report income to the IRS by the paying party. A 1099-K form is used by third party apps like DoorDash to report the payments they made to delivery drivers.
Trading one cryptocurrency for another
You have the choice to exchange your cryptocurrency when investing in cryptocurrencies. The initial coin must officially be sold before being exchanged for another one. Cryptocurrency profits are taxed in this way if you sell for a profit and have to pay taxes on the transaction.
Crypto Capital Gain or loss
Like stock profits, cryptocurrency profits must be subject to federal taxation. Investors who utilize virtual currencies must pay capital gains taxes on their profits because the IRS views them as property. The amount of profit you make and how long you possessed the cryptocurrency before selling it will both affect how much tax you owe. If you kept the cryptocurrency in your possession for under a year, you will have to pay taxes according to short-term capital gains. On the other hand, holding crypto assets for more than 365 days would attract long-term capital gains taxes.
StaIf you stake your bitcoin, you can take part in this process and earn rewards, but those benefits are taxed.
How to File Taxes for Cryptocurrencies
The most crucial thing for businesses and investors to comprehend is that they must inform the IRS of their cryptocurrency holdings, gains, and losses when paying their taxes. It is required to submit your cryptocurrency tax returns to the IRS, and you must follow particular procedures when doing so.
Determine what, if any, is owing — It’s likely that a tax liability incurred if an investor executed a cryptocurrency transaction from the list above.
Keep a record of all transactions and report them — You must declare any cryptocurrency transactions on your tax return. The IRS demands this paper trail, just like with stocks and other investments, to make sure that a person reports their total tax burden. A transaction history will often be provided to the investor by a crypto exchange.
With your tax return, provide the appropriate forms — Depending on how a person has used their cryptocurrency, the IRS may request different documents. For example, including calculating capital gains or losses on Form 8949, reporting the results on Schedule D of Form 1040, to list and summarize capital gains or losses. To report your other self-employed income gains and losses you use Schedule C for Form 1040.
Final words
In order to make sure cryptocurrency investors pay their taxes, the IRS is ratcheting up its efforts. Investors should be aware of it because the tax implications of cryptocurrencies are murky and complex. Investors looking to lower their cryptocurrency tax obligation have a number of alternatives, including purchase and hold, tax-loss harvesting, charitable donations, etc. You can download FlyFin to ease your process for crypto taxes. You can also use a 1099 tax calculator to accurately find your taxes.
