Your friends, your family, or your financial advisor might have been telling you what a great investment cryptocurrency is. While it certainly has paid off for some, it's essential that you understand the basics of these types of currencies.
There's also additional information you should know about its value, how to complete transactions, and how to store it. An often overlooked element is declaring cryptocurrencies when it comes to taxes. As you can see from the crypto payments infographic produced after a Scanteam investigation, the use of crypto is on the rise.
Understanding how crypto taxes work is about to become a critical subject for a large number of people. We spoke to industry expert Alex Lysak to get a simple explanation of what you need to consider and what you should do next. Read on to understand the tax implications of cryptocurrency.
The short answer is yes. You'll need to report cryptocurrency when you file your tax return. The government crackdown on tax evasion includes a focus on cryptocurrency. Even though you are reporting your cryptocurrency transactions, it doesn't mean you'll owe tax. However, failing to report could lead to severe consequences.
The internal revenue service (IRS) has taken steps to make it easier to report. It has also written letters to virtual currency owners to remind them to file current returns and amend previous ones. Here are some key points to remember about cryptocurrency reporting:
The government has recently confirmed that transfers of $10.00 or more need to be reported to the IRS.
The IRS tax form now has a yes or no question on the tax form asking about cryptocurrency. Ticking yes is the first step to accurately reporting cryptocurrency transactions.
Failure to report income or capital gains from cryptocurrency may result in fines, tax debt, interest, and in the worst cases, criminal prosecution.
In efforts to make clear how crypto is taxed, the IRS has set out a definition of virtual currencies. You'll need to answer the question of whether you have received, sold, sent, exchanged, or otherwise acquired a financial interest in any virtual currency. If the answer is yes, you'll need to attach a crypto tax return alongside your standard form.
Some important distinctions when it comes to crypto taxes:
Crypto is classed as property, not currency. That's why you might use tax form 8949 to report it.
Transactions, such as selling, mining, exchanging, or spending cryptocurrency, must be reported to the IRS as they are taxable events.
The tax you owe is determined by the capital gains or losses in the tax year.
There's a difference between short-term gains and long-term ones. The former uses the same rate as your income. The latter will have a set rate of 0% to 20% depending on the amount.
Bitcoin transactions are taxable. However, it's essential to note that it isn't the only cryptocurrency you need to report. Ethereum, Litecoin, and other currencies need to be included too. You might have found some exciting new currencies to invest in, so remember that mining Dogecoin could also be a taxable event.
When you exchange one cryptocurrency for another, for example, selling Zoocoin to buy Ethereum, it's a taxable event.
The like-kind rule means that investment in a similar property defers capital gains taxes and doesn't apply to crypto. The IRS confirmed this in 2018, which means you'll need to include exchanges on your report, though it doesn't necessarily mean you'll pay tax on them.
There are times when moving your cryptocurrency around doesn't need to be reported. For example, if you take your Bitcoin from one wallet and place it somewhere else, it isn't a taxable event. In this case, since the crypto remains in your possession, it's considered a transfer, not an exchange.
You'll need to complete Form 8949 to fill out your cryptocurrency information for the tax year. You should list every transaction and provide the following details for each:
Date of acquisition and the date of sale.
If you held the crypto for more than a year, the transaction should be completed under the long-term gains heading. Everything under one year should be listed as short-term gains.
You need to enter the cost basis. This label refers to the amount you initially spent.
It should be followed up with the sales proceeds, which is the amount you sold the crypto for, and that should be listed in USD.
The sales price minus the cost basis is how you calculate your capital gains or losses.
To work out how much tax you owe, you need to take the totals from Form 8949 and add them to Schedule D of the tax form 1040.
Selling, exchanging, or spending coins is taxed as property by looking at your capital gains. However, receiving coins through an airdrop, mining, or as a payment for services or goods counts as income.
When crypto is classed as income, you'll need to report it with your gross income. To do this, you must calculate the fair market value of the coins at the time you received them. The amount should be in USD. It could go on your Schedule 1, or if you were an independent contractor mining crypto, it goes on the self-employed taxpayers' form, Schedule C.
If you sell coins that you received as income, you report that same amount that you declared as the cost basis on Form 8949.
Every exchange needs to be reported to give the IRS a clear picture. It's in your best interest to report losses, as without them, it will seem as if you own more than you do. The losses are used to offset the gains, so including them will mean you pay the correct amount of tax, which is less than if you had no losses.
Keep in mind that federal and regional tax laws may differ and some states may use a different method than the IRS to determine the value of the cryptocurrency. Keeping a record of all your purchases and sales and the value in USD at the time will make filing your crypto taxes much easier. Although you do need to report it, it doesn't mean that you'll have to pay anything.
Alex Lysak is the CEO of Scanteam and a professional digital marketer. You can join him on social media at the following profiles:
Content creation is my passion and profession. I am an avid reader which basically inspired me to get into writing. I love to read and know about almost everything under the Sun. Apart from spending time writing and reading, I love exploring new places and getting to know different cultures.