So, do we have to pay taxes on cryptocurrency? The answer is YES. The IRS considers cryptocurrency holdings to be “property” for tax purposes, which means your virtual currency is taxed in the same way as any other assets you own. You must pay taxes on any virtual coin you transacted. Taxes will also be applied if you use cryptocurrency to pay for taxable items. Wages, commissions, or income from side businesses are also needed to report.
Cryptocurrency Taxes and Reports
If you have exchanged, sold, or used cryptocurrencies to buy goods and services, you will need to report the profits made from all those transactions.
The new IRS Form 1040 (federal annual tax return) includes a section asking if you received, sold, sent, exchanged, or redeemed virtual currency. If you purchased any form of virtual currency with real money, whether personally or through your business, you would have to answer “no” to this question. However, if you profit from any form of virtual currency through mining, you must answer “yes” because that value will be taxed immediately.
You also need to report certain profits on Form 8949. For example, if you buy Bitcoin for $1,000 and then sell it for $1,500, you have $500 in profit, this is the amount you will have to pay tax. However, if you sell those Bitcoins for $500, resulting in a loss of $500, you can deduct those losses to cover the capital gains.
Cryptocurrency Taxes Calculation
To calculate the amount of taxes, you need to determine how much you have gained and lost from all of your transactions. To do so, firstly, convert the value of your virtual currency into the US dollar. That value, including any fees paid, is called the cost basis. Compare this with the price when you sell or spend it to calculate your tax liability.
Besides, you also need to account for the period of time your asset has been held. This will determine the type of capital gain or loss. Depending on how long you have owned your cryptocurrency, your gain or loss will be divided into two categories known as “short-term” or “long-term”:
| Short-term | Long-term |
| – Short-term capital gains or losses refer to assets you own within a 365-day period. – This crypto tax rate is similar to standard income rates, from 10% to 37%. | – Long-term capital gains or losses refer to assets you’ve owned for more than a year before selling. – Depending on your income, these are taxed at a lower rate from 0% to 20%. |
We mentioned in the first section about deducting your losses to offset capital gains. This offset can only be made with the same type of profit and loss. For example, short-term losses will reduce your short-term profits first. Any remaining net loss can be used to offset another capital gain.
If you have capital losses, they are used to offset up to $3,000 in regular income. After that, any remaining losses will be carried over to the next year.
The Consequences for not Reporting Your Cryptocurrency Transactions
Failure to report your crypto transactions can result in penalties, interest, and IRS audits. The IRS won’t excuse any delays, even if you don’t know about the requirements.
Furthermore, cryptocurrencies can be secured in many ways and cover the owner’s identity quite well, but that doesn’t mean your information can’t be tracked down. The IRS Anti-Fraud Enforcement Office has direct connections to private organizations to identify individuals who attempt to fraudulently avoid reporting cryptocurrency profits.
Crypto Tax Softwares
To make sure you follow the rules, keep track of all your transactions and note them down carefully. While you can hire a vendor or third-party monitor to help you, you can also use online trackers and calculators as other options. Pionex, Blockfolio, Coinstats,… are some of the best crypto tax software for you to consider.
(Reference: Smallbiztrends)
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