It’s that time of year again! Here’s a quick guide on how to report your cryptocurrency earnings on your taxes.
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As crypto becomes more mainstream, the IRS is taking notice. In March 2018, the tax agency released new guidance clarifying its position on digital currencies, and it’s now issuing more detailed advice to taxpayers.
If you own crypto, you may be wondering how to report it on your taxes. The answer depends on what you do with it.
Here’s a quick overview of the IRS guidance on crypto and what it means for your tax return:
· If you use crypto as a currency to buy goods or services, you must report it as income on your tax return. This is true whether you use crypto to buy things in the real world or online.
· If you hold onto crypto as an investment (known as “HODLing” in crypto parlance), you don’t have to pay taxes on it until you sell or trade it. When you do, you’ll owe capital gains taxes on any profits you made from the sale.
· If you trade one type of cryptocurrency for another, you must pay taxes on the difference in value between the two currencies. For example, if you trade Bitcoin for Ethereum, you would owe taxes on any increase in value of the Ethereum when traded for Bitcoin. However, if the Ethereum lost value when traded for Bitcoin, then no taxes are owed.
The IRS is still ironing out some of the details around crypto taxation, but these are the basics that every taxpayer should know.
What is cryptocurrency?
Cryptocurrency is a digital or virtual currency that uses cryptography for security. It is not issued by any central authority, making it decentralized. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Since then, over 4,000 altcoins (alternative variants of Bitcoin, or other cryptocurrencies) have been created.
Cryptocurrency is often considered to be a volatile investment due to its highly fluctuating prices. For tax purposes, cryptocurrency is treated as property. This means that any gains or losses from selling or buying cryptocurrency would be subject to capital gains taxes.
In order to calculate your capital gains or losses, you will need to track the cost basis ( original purchase price) and fair market value (current market value) of your cryptocurrency holdings. Fair market value can be determined by using online exchanges or pricing information from CoinMarketCap .
If you have made a profit from selling cryptocurrency, you will need to report this on your taxes. The IRS has stated that crypto is taxable as property, not currency . This means that any gains or losses from buying, selling, or trading cryptocurrency would be subject to capital gains taxes .
To report your capital gains or losses from cryptocurrency , you will need to file a Form 8949 with your annual tax return . Form 8949 is used for reporting sales and other dispositions of capital assets . On Form 8949, you will need to include the date of acquisition , date of sale , proceeds , cost basis , and capital gain or loss for each disposition .
If you have any questions about how to report your crypto taxes, you can consult with a tax professional or reach out to the IRS directly.
How is cryptocurrency taxed?
The answer to this question depends on how you acquired the cryptocurrency, and what you did with it afterwards.
If you simply bought cryptocurrency and held it as an investment, you will need to report any gains or losses when you sell or trade it. Gains are taxed as capital gains, at either short-term or long-term rates depending on how long you held the cryptocurrency before selling it. Losses can be deducted as capital losses, up to $3,000 per year.
If you used cryptocurrency in a business transaction, you will need to report the income or loss just like any other business income. The fair market value of the cryptocurrency at the time of the transaction will be considered your income or loss.
You may also owe self-employment tax if you are a sole proprietor and earned income from your crypto transactions.
Lastly, if you simply received cryptocurrency as a gift or payment, there is no tax implications for you at this time. However, the person who gave you the cryptocurrency may be responsible for paying any applicable taxes.
What if I don’t report my cryptocurrency?
If you don’t report your cryptocurrency, you may be subject to penalties and fines. The IRS has said that people who do not report their cryptocurrency could be subject to “failure-to-pay” penalties, “failure-to-file” penalties, and even criminal charges.
How do I report my cryptocurrency on my taxes?
The IRS has issued guidance on how to report cryptocurrency on your taxes. You will need to report your cryptocurrency as either capital gains or income. Capital gains are reported when you sell or exchange cryptocurrency, and income is reported when you receive cryptocurrency for goods or services.
If you have sold or exchanged cryptocurrency, you will need to calculate your gain or loss on the transaction. You will then report this gain or loss on your tax return.
If you have received cryptocurrency as income, you will need to report the fair market value of the cryptocurrency at the time it was received. You will then include this amount in your taxable income.
In conclusion, it is important to know how to report crypto on your taxes. The IRS has clear guidelines on what needs to be reported and how. Failing to report your crypto earnings could result in hefty fines and penalties.If you have any questions about reporting crypto on your taxes, please consult a tax professional.