Cryptocurrency Tax Obligations: Essential Information You Should Be Aware Of!
Going hodl in the world of digital money? Break it down with this straightforward guide to cryptocurrency taxes!
Crypto, a fancy word for digital cash, ain't regulated like your grandma's savings account. As a new breed of asset, it operates independently and comes with a set of tax rules that'll twist your brain if you ain't in the know.
To make things simpler, let's break it down:
What's the deal with crypto?
Crypto is a decentralized digital currency that operates independently of any central bank. Just like Bitcoin, Ethereum, and Litecoin, it uses cryptography for security and is created through a process called mining. Transactions are tracked on a shared, public ledger, called a blockchain.
Tax heaven or tax hell?
The IRS treats crypto as property for tax purposes. That means gains or losses from selling or trading crypto will be subject to capital gains tax. You're looking at short-term and long-term capital gains tax rates, depending on how long you've got your crypto stash.
- Short-term capital gains tax rates: Descend on you if you hold onto your crypto for less than a year. Rates range from 10% to 37% (yowza!), based on your personal income[1][5].
- Long-term capital gains tax rates: Let you off easy if you keep your crypto for more than a year. Rates typically range from 0% to 20%, depending on your income level[1][5].
Swing by the Begginer's Trading Guide for all the juicy tips on making trades like a pro[6].
Got gains? These are your losses!
Got a piece of digital gold that just turned into a block of cheese? You could've--drumroll, please--incurred a capital loss. Conversely, a winning ticket will bring on some capital gains. Don't forget to keep track of your crypto transactions to accurately calculate those numbers.
Less is more
Keeping an accurate record of your crypto transactions is essential for staying legit with the IRS[5]. Document the date of acquisition, the purchase price, the sale date, the sale price, and any transaction fees. Lean on trustworthy software like CoinTracking, CryptoTrader.Tax, or Bitcoin.tax to help you manage it all[6].
Fork in the road
Mining crypto? That's taxable too. When you create new crypto, the fair market value of the asset on the day you received it is considered income for that tax year[5].
If mining crypto's your biz, consider deducting the expenses related to mining from your income, including electricity, hardware, and other related costs.
Getting paid in crypto?
Getting compensated in crypto? The fair market value of the crypto you received on the day you got it is taxable income[5]. If you got that digital dough as payment for your services, you'll also be looking at self-employment tax, which is 15.3% of your net self-employment income[5].
declaration time!
Don't forget to report crypto transactions on your tax return. For capital gains and losses, use Form 8949. Include the total amount of capital gains and losses on Schedule D.
If crypto dough hits your account, include the fair market value of the crypto on the day you received it as income on the appropriate form like Schedule C (you're self-employed) and pay estimated taxes throughout the year if you don't have taxes withheld from payments[5].
Tax strategies for avoiding heartache
Want to ease the tax pain?
- Hang onto your crypto for more than a year to qualify for lower long-term capital gains tax rates.
- Offset capital gains with capital losses. If you incurred losses from other investments, use 'em to offset your capital gains from crypto. You can even deduct up to $3,000 of the losses from your income[5].
Keep in mind that these are just a few tips; consult with a tax professional before making any moves.
Mining has its own tax nuances
Mining crypto is taxable, and the fair market value of the cryptocurrency you received is taxed as income[5]. If your mining operation is a business, you'll want to report your income on Schedule C and claim gaming-related expenses[5].
If it's a hobby, tax still applies, but you'll report it under "other income" on Form 1040. You won't be able to deduct any expenses related to your mining activity[5].
P.S. If you mine in a pool, you'll only need to report your share of the income[5].
Conclusion
Understanding crypto taxes is a ticket to informed investment decisions and a shield against future tax-related issues[5]. Be aware of the tax implications for mining and trading cryptocurrencies, keep accurate records, and consult a professional when in doubt. Follow these guidelines to keep your digital coin collection on the up and up!
Article and permission to publish provided by Jean Nichols[7].
[1] IRS-Notice-2014-21: https://www.irs.gov/pub/irs-drop/n-14-21.html[2] IRS Press Release: "IRS Reminds Taxpayers to Report Virtual Currency Transactions": https://www.irs.gov/newsroom/irs-reminds-taxpayers-to-report-virtual-currency-transactions[3] IRS Publication 551: http://www.irs.gov/publications/p551/ch06.html[4] State Taxation of Cryptocurrencies: https://www.natlawreview.com/article/state-taxation-cryptocurrencies-bitcoin-ethereum-and-beyond[5] Cryptocurrency Investment and Taxes Guide: https://our website/cryptocurrency-investment-and-taxes-guide/ (written for our platform on April 20, 2023)[6] Beginner's Trading Guide: https://our website/beginners-trading-guide/ (written for our platform on April 20, 2023)[7] Cryptocurrency Investment and Taxes article and permission to publish here provided by Jean Nichols. Originally written for our platform and published on April 20, 2023.
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In the realm of digital finance, capital gains tax is applied to the selling or trading of cryptocurrencies, such as Bitcoin, Ethereum, and Litecoin. For holding crypto for less than a year, short-term capital gains tax rates ranging from 10% to 37% may be incurred. On the other hand, holding crypto for more than a year may result in lower long-term capital gains tax rates, typically ranging from 0% to 20%. It's essential to keep accurate records of transactions for a smooth tax filing process.
Investing in cryptocurrency comes with a certain degree of financial risk, but understanding the tax implications can provide a foundation for informed decision-making and avoid potential issues down the line. Maintaining a record of crypto transactions, including the date of acquisition, purchase price, sale date, sale price, and any transaction fees, is an essential step towards complying with tax regulations.
