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The IRS treats cryptocurrency as property for tax purposes. This means that every time you buy, sell, or trade cryptocurrency, you may trigger a taxable event.
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Introduction
When it comes to taxes on cryptocurrency, things can get confusing. That’s because there are currently no clear guidelines from the IRS on how to treat crypto gains and losses. As a result, many people are unsure of how to properly report their crypto activity come tax time.
In this article, we’ll give you a general overview of how taxes on crypto work. We’ll also provide some tips on how to stay compliant with the IRS.
Please note that this is not tax advice. Before taking any action with your taxes, we highly recommend that you speak with a certified tax professional.
How are taxes on crypto calculated?
In the United States, cryptocurrency is taxed as property. That means when you buy, sell, or trade crypto, you may have to pay taxes on any gains. The IRS views cryptocurrencies as investment assets, so any profits you make from buying, selling, or trading crypto are subject to capital gains taxes.
To calculate your capital gains taxes, you’ll need to track your cost basis (the original price you paid for your crypto) and the value of your crypto at the time of sale. If you’ve made a profit, you’ll owe taxes on that amount. The tax rate you’ll pay depends on your income bracket.
If you’ve lost money on your crypto transactions, you may be able to deduct those losses from other capital gains or from your income taxes. To claim a loss, you’ll need to itemize your deductions on your tax return.
What are the different types of taxes on crypto?
The Internal Revenue Service (IRS) taxes cryptocurrency as property. This is because crypto isn’t considered legal tender in the United States. When you sell crypto, you have to report it as a capital gain or loss on your taxes.
If you hold crypto for more than a year before selling it, you’re eligible for long-term capital gains rates. These are lower than short-term capital gains rates, which apply if you hold crypto for less than a year.
In addition to capital gains taxes, you may also have to pay self-employment tax if you mine crypto or receive it as payment for goods or services.
The IRS has issued guidance on how to report crypto taxes, but the agency is still working on issuing more specific rules. In the meantime, make sure to keep good records of all your cryptocurrency transactions so that you can accurately report them come tax time.
What are the benefits of paying taxes on crypto?
While many people view taxes as a burden, there are actually some benefits to paying taxes on crypto. By doing so, you can:
-Help ensure the legitimacy of your transactions: When you pay taxes on crypto, you are essentially declaring your income and assets to the government. This helps to legitimize your transactions and could make it easier to prove their validity in the event of a dispute.
-Avoid penalties: If you do not pay taxes on crypto, you could be subject to penalties from the IRS or other tax authorities. These could include fines, interest charges, and even jail time in some cases.
-Get a deduction: In some cases, you may be able to deduct the cost of your crypto assets when you file your taxes. This could reduce the amount of tax you owe.
What are the risks of not paying taxes on crypto?
The biggest risk of not paying taxes on crypto is that you may owe back taxes plus interest and penalties. The IRS has been cracking down on cryptocurrency tax evaders and has even set up a special task force to investigate them. In 2019, the IRS sent out more than 10,000 warning and compliance letters to taxpayers who had failed to report their cryptocurrency transactions. And in 2020, the IRS began sending out letters to taxpayers who may have underreported their taxes owed on cryptocurrency.
If you are caught evading taxes on crypto, you may be subject to criminal charges, including up to five years in prison and a fine of up to $250,000.
Conclusion
The IRS hasn’t issued specific guidance on how to treat cryptocurrency taxes, so it’s important to consult with a tax professional if you have any questions. In general, though, you’ll need to report gains or losses from selling or trading cryptocurrency as capital gains or losses on your federal tax return. Depending on the circumstances, you may also need to pay self-employment taxes if you mine cryptocurrency.
