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The IRS has issued guidance on how to report cryptocurrency transactions on your taxes. Here’s what you need to know.
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Introduction
Cryptocurrency, also known as virtual currency or digital currency, has been receiving a lot of attention lately from investors and from the IRS. The IRS has issued several warnings recently about the taxes related to cryptocurrency transactions. So, do you need to report crypto on your taxes?
The answer is, it depends. If you’ve bought, sold, traded, or otherwise invested in cryptocurrency, you may need to report it on your taxes. Here’s what you need to know about reporting cryptocurrency on your taxes.
Cryptocurrency is considered property for tax purposes. This means that any gains or losses from buying, selling, or trading crypto are subject to capital gains taxes. If you’ve made a profit from cryptocurrencies, you may be liable for short-term or long-term capital gains taxes depending on how long you held the currency before selling it.
If you’ve lost money on cryptocurrency investments, you may be able to deduct your losses on your tax return. However, there are limits on how much you can deduct and how those deductions are calculated. You should speak with a tax professional if you have questions about how to deduct crypto losses on your taxes.
In addition to capital gains taxes, you may also be subject to other types of taxes when it comes to cryptocurrency. For example, if you receive cryptocurrency as payment for goods or services, that income is taxable as ordinary income. And if you mine cryptocurrency, that income is also taxable.
The bottom line is that whether or not you need to report crypto on your taxes depends on your individual situation. If you’re not sure whether or not you need to report cryptocurrency on your taxes, we recommend speaking with a tax professional.
What is cryptocurrency?
Cryptocurrency is a digital or virtual asset that uses cryptography for security. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Cryptocurrencies are often traded on decentralized exchanges and can also be used to purchase goods and services.
How is cryptocurrency taxed?
The IRS treats cryptocurrency as property, so if you sold yours for a profit, that’s a taxable event — just like selling stocks, bonds or real estate. The IRS is still ironing out the details of how to best tax cryptocurrency, but for now, the main thing to know is that you owe taxes on any gains.
Here’s how it works: Let’s say you bought one bitcoin for $500 in January 2017 and sold it for $900 in December 2017. That’s a $400 gain, which you would report on your taxes. (You would also owe state taxes in most states.)
If you held the bitcoin for less than a year before selling it, your gain would be taxed as short-term capital gains, which are taxed at your ordinary income tax rate. If you held it for more than a year, it would be taxed at the long-term capital gains rate, which is 20% for most people.
Do you need to report cryptocurrency on your taxes?
Cryptocurrency is a type of digital or virtual currency that uses cryptography for security. A defining feature of cryptocurrencies is that they are decentralized, meaning they are not subject to government or financial institution control.
Cryptocurrency is taxed like any other investment. If you bought crypto and it went up in value, you owe capital gains taxes on your profits when you sell. If it goes down, you can deduct your losses (up to $3,000 per year or $1,500 if you are married filing separately).
You also need to report any cryptocurrency income on your tax return. This includes income from mining, staking, interest, gifts, and selling crypto. You will need to calculate your gain or loss for each transaction and report it on Schedule D of your Form 1040.
If you don’t report cryptocurrency transactions on your tax return, you may be subject to penalties and interest. So it’s important to keep good records of all your crypto activity.
What if you don’t report cryptocurrency on your taxes?
If you don’t report cryptocurrency on your taxes, you could face a number of penalties, including:
-A civil penalty of up to $200 for each failure to properly report cryptocurrency transactions, depending on the severity of the failure
-An accuracy-related penalty equal to 20% of the amount of taxes you owe
-Criminal charges, which could result in jail time and/or fines
Conclusion
At this time, the IRS has not provided any specific guidance on how to report cryptocurrency transactions on your taxes. However, they have said that cryptocurrencies are taxable as property, which means that any gains or losses from buying, selling, or trading crypto will be subject to capital gains tax.
If you have made any profits from cryptocurrency transactions in the past year, it is recommended that you speak with a tax professional to determine how those profits should be reported on your taxes.
