One of the most important things to consider when investing in cryptocurrencies is how to handle them when the time comes for you to pay taxes on your gains. With that in mind, this article will provide a comprehensive look at what cryptocurrency is, how it works, and the taxes involved. We’ll also look at some of the most popular options when paying your cryptocurrency taxes.
What is cryptocurrency?
Cryptocurrency is probably the hottest thing in the world right now. It’s the money of the future, and like many other things that are ahead of their time, it’s not fully understood by most people just yet. Cryptocurrency is a digital currency that uses encryption to secure transactions, control the creation of additional units, and verify transactions on a public ledger with blockchain technology. This means there are no centralized authorities governing its use – its users decide when and how to use it.
What are the advantages of cryptocurrency?
Cryptocurrencies have many advantages over traditional fiat currencies. One of the biggest is the decentralization of currency. This means no single authority controls it, and that means there are no third-party seizures or account freezes – you’re totally in control at all times. Another advantage to cryptocurrency is that it’s free from government taxation – at least for now. That means no capital gains, no capital losses, and you don’t have to worry about converting your cryptocurrency into fiat currency to pay taxes on it.
How Do Cryptocurrency Taxes Work?
Now that you know more about cryptocurrencies, it’s time to talk about taxes. Cryptocurrency gains and losses work similarly to those of other investments. There are gains and losses, but these are taxable events where the IRS will most definitely want some of your cryptocurrency. For purposes of this discussion, we’ll be focusing on two main things when it comes to taxation: capital gains and exchanges.
What is a capital gain or loss?
A capital gain or loss happens when you buy an investment and sell it at a higher price. You have made a capital gain on that financial asset if the sale price is higher than the purchase price. Capital gains are generally taxed at a lower rate than other types of income – depending on your tax bracket and how long you have held the investment before selling. Capital losses occur when you sell an investment for less than you purchased it. These are not tax benefits but are typically carried forward to offset any future capital gains.
What is an exchange?
An exchange is just like it sounds – you’re exchanging one cryptocurrency for another cryptocurrency. This type of transaction does not generally trigger a taxable event for regular investors. As long as the value of the currency or cryptocurrency you’re receiving isn’t higher than the amount you sold, then there’s no tax event and no need to report anything to the IRS.
What is a capital gain or loss on an exchange?
If you’re a trader, you buy and sell cryptocurrency regularly. This means that you’re constantly exchanging one currency for another – to make money. You’ll notice that there is a cost associated with this type of trading as well. That is your brokerage fee, which can be pretty high – sometimes as high as 10% or more. This means you’re not only exchanging one currency for another, but it’s costing you money as well. That automatically triggers a taxable event since you’re gaining an asset (cryptocurrency) and paying a fee to do so – offsetting your gains is pretty tricky because even the fees that you pay are an expense.
How Do I Report Cryptocurrency to the IRS?
Now that we know how crypto taxes work, we need to figure out how to report them. There are two options here – report them directly to the Internal Revenue Service (IRS) or pay them through your private accountant.
If you report these cryptocurrencies to the IRS, you’ll need to fill out and file form 8949 with your tax returns. This form is often known as a “1099-B” for short, and it’s what you’ll use if you’re selling cryptocurrency regularly to fund your lifestyle. There are also other instructions that you need to read and follow, and if you’re selling large amounts of cryptocurrency to fund your lifestyle, then this process may take you a while.
The alternative method is to include the amount of the cryptocurrency on your tax returns by paying your accountant directly. This isn’t generally very successful – especially for traders. The problem here is that you’re not going through a broker, so the fees for this process will be much higher than those of the IRS, so it’s not always worth it. Most people won’t be able to afford this option at all.
What are the Tax Rates for Cryptocurrency?
As we mentioned before, cryptocurrency is taxed as a capital gain. This means traders who convert one currency into another will not be taxed when they convert. They will, of course, still have to pay taxes on their gains from trading – and that’s where the confusion comes in. After all, you’re still making money, so where does the tax liability come from? The answer to this is that it’s not entirely clear yet.
If you’re holding onto your cryptocurrency for a long time and then selling it at a profit, then you’ll be taxed on that profit at a rate of 20%. This rate applies to capital gains from property sold in the US. If you’re often trading, then you’re likely to face a 22% rate for long-term capital gains as well.
How To Minimize Cryptocurrency Tax
As you’ve probably already learned, cryptocurrencies are not fully regulated by the federal government – this means there’s a lot of grey area when it comes to the tax law for traders, especially those who are trying to sell their holdings. Here are a few steps you can take to minimize your taxes when dealing with cryptocurrency.
1. Don’t sell at a loss.
Always try to sell your holdings to make money. If you’re selling an asset for less than you paid for it, then that’s a loss, and you should report that gain on your tax returns. Don’t forget about capital losses either – these will offset any gains, so if you have some of these losses, don’t make the mistake of thinking that they’re no longer useful.
2. Hold onto your cryptocurrency for longer than a year.
As we mentioned earlier, if you’re holding onto crypto for longer than a year, then you’ll pay long-term capital gains rates. This rate is 0% of your income is below $38,600 as an individual or $77,200 as a married couple filing jointly. If this sounds like it may apply to you and your cryptocurrency profits, then hang onto it! You don’t want to trigger short-term capital gains taxes, which are much more expensive at 23.8%.
3. Keep accurate records of your transactions.
You may not be required to report your cryptocurrency transactions directly to the IRS, but that doesn’t mean you’re off the hook in terms of taxes. You should have a good system in place for keeping track of all of your cryptocurrency trades so that if the IRS does require you to report them, then it’s not a big deal. It’s wise to keep track of all trades no matter what – especially if you plan on becoming a trader and doing this professionally.
4. Report your losses.
Don’t forget to report the cryptocurrency that you lose. If you sell out of a bad position and your investment goes down in value, then that’s a loss. Remember to report these on your taxes!
5. Keep track of mining income.
If you’re mining for cryptocurrency, then you should keep track of this income – even if it’s just for hobby purposes. You should also report this information on your taxes and file it simultaneously with your other forms 1040 and related schedules.
6. Report gains to your tax preparer.
While they’re not required to report it to the IRS, it’s a good idea to tell your tax preparer about the cryptocurrency that you made on each trade so that they can include the profit in their calculation. After all, they’re doing this for free, and you should be giving them more than just a simple estimate of your income – you should want them to know exactly how much money you made.
When to Report Cryptocurrency Trades on Your Tax Return.
So now we’ve learned how cryptocurrency taxes work and how to report them – but when should you report them? This is a complex question, and there isn’t a simple answer. The reality is that cryptocurrency doesn’t exist in tangible form outside of a computer network or smartphone, so it’s not an asset. That means you can’t hold it in your hands like you would a house or a car. The dilemma here is that you can’t easily tell when you’ve made a profit from your crypto trades, so how can you know when to report taxes?
The good news is that it’s not a difficult process to follow – but it does take some time and effort. You’ll need to keep track of all of your trades for a year, including the amount of each trade and its date. This will allow you to calculate how much money you made from cryptocurrency trading during the previous tax year. Once you have the amount you made, you can calculate how much tax you’ll owe based on your situation. This is pretty much the only way to report cryptocurrency taxes.
In conclusion, it’s important to keep in mind that this is all still a work in progress for the IRS – and then there’s the matter of state law which could complicate things further. In the future, the tax laws for crypto trading might be entirely different, but for now, these are the basics. You need to keep track of all of your trades and report them accordingly. This will require a fair amount of work on your part, and it’s not something that can be done automatically or with any automation. However, once you get past this initial investment in time and resources, then you’ll have a much easier time when it comes to calculating and paying your cryptocurrency taxes in the future.
If you need assistance with tax-related concerns from your cryptocurrency profits, turn to a trusted accounting agency. One of the most reliable accounting agencies in Florida is Swiftbooks, LLC. Call 786-204-2881 for more information.
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