When it comes to taxes and cryptocurrency, the question isn’t whether you should pay them, but how. Here’s a guide to help you figure it out.
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The Internal Revenue Service (IRS) has issued guidance on the taxation of cryptocurrency transactions. The guidance, which was first issued in 2014, provides that virtual currency is treated as property for federal tax purposes. As a result, general tax principles applicable to property transactions apply to transactions using virtual currency.
The IRS has further clarified that cryptocurrency is not treated as currency for federal tax purposes. This means that cryptocurrency is not subject to capital gains tax. However, cryptocurrency is still subject to other taxes, such as sales tax and self-employment tax.
The IRS guidance provides that taxpayers must report gains or losses from cryptocurrency transactions on their federal income tax return. Gains or losses are calculated by subtracting the cost basis of the virtual currency (the price at which it was purchased) from the proceeds of the sale or exchange. The cost basis is the fair market value of the virtual currency at the time of purchase. If the fair market value is not readily available, taxpayers can use a reasonable approximation.
Taxpayers who fail to report income from cryptocurrency transactions can be subject to penalties and interest. In addition, taxpayers who do not properly report their crypto transactions may be subject to civil and criminal penalties.
What is a taxable event?
In the world of cryptocurrency, a taxable event is any transaction that results in a capital gain or loss. This could be anything from selling cryptocurrency for fiat currency (like US dollars) to exchanging one cryptocurrency for another.
For taxes, capital gains are calculated by subtracting your cost basis (what you paid for the crypto) from the proceeds of the sale. If the resulting number is positive, you have a capital gain and may be subject to taxes. If the number is negative, you have a capital loss and may be able to use it to offset other gains or reduce your overall tax liability.
Here are some examples of taxable events in the world of cryptocurrency:
-Selling crypto for fiat currency (like US dollars)
-Exchanging one crypto for another
-Using crypto to buy goods or services
-Receiving crypto as income or compensation
-If you give away or donate crypto
What is considered a sale or exchange of cryptocurrency?
In order to figure out if you owe any taxes on your cryptocurrency transactions, you first need to know if they constitute a sale or exchange.
The IRS considers a sale or exchange of cryptocurrency to be a taxable event. If you sold, exchanged, spent, or disposed of your cryptocurrency during the tax year, you will need to report those transactions on your tax return.
The profit or loss from the sale or exchange of cryptocurrency is taxed as capital gains or losses. This means that short-term gains (gains on assets held for less than a year) are taxed at your regular income tax rate, while long-term gains (gains on assets held for more than a year) are taxed at a lower rate.
If you don’t have records of your cryptocurrency transactions, don’t worry – the IRS can still tax them. The IRS has stated that it will consider any kind of transfer of cryptocurrency to be a taxable event, even if it’s not an exchange for another currency. This means that even if you simply gifted Crypto to someone else, you may still owe taxes on it.
What if I don’t have enough information to calculate my gain or loss?
If you don’t have enough information to calculate your gain or loss, you may have to use the fair market value of the crypto on the day you transferred it.
What if I receive cryptocurrency as a gift?
The answer to this question depends on a couple of factors, including the type of cryptocurrency you receive and the value of the cryptocurrency at the time you receive it.
If you receive cryptocurrency as a gift, you will not be subject to any tax on the value of the cryptocurrency at the time you receive it. However, if you later sell or trade the cryptocurrency, you may be subject to capital gains taxes on any appreciation in value since the time you received it.
For example, let’s say that you receive one Bitcoin as a gift on January 1, 2018. The value of Bitcoin at that time was $1,000. On December 31, 2018, you sell that Bitcoin for $10,000. You will owe capital gains taxes on your $9,000 in gains.
What if I donate cryptocurrency to a charity?
Generally, no. The IRS says that if you donate cryptocurrency to a qualified charity, you don’t have to pay taxes on the transaction.
What if I lose my cryptocurrency?
Losing cryptocurrency can happen in a number of ways, including:
-Physical theft of your device or paper wallet
-Hacking or malware attack on your digital wallet
-Forgetting your login credentials
-Mishandling or misplacing your private keys
If you lose your cryptocurrency, it is gone forever and there is no way to recover it. You will also not be able to claim any tax deductions for the loss.
What if I die and leave my cryptocurrency to my heirs?
If you die and leave your cryptocurrency to your heirs, it will be a taxable event for them. In order to calculate the tax, they will need to know the fair market value of the cryptocurrency at the time of your death.
How do I report cryptocurrency on my taxes?
The answer to this question depends on a few factors, including the type of cryptocurrency you have and what you plan to do with it. For example, if you sell cryptocurrency for cash, that would be considered a taxable event and you would need to report it on your taxes. However, if you simply transfer cryptocurrency from one wallet to another, that is not considered a taxable event.
Here are some general guidelines to keep in mind when it comes to reporting cryptocurrency on your taxes:
-If you sell cryptocurrency for cash, that is a taxable event and you will need to report it as income on your taxes.
-If you give cryptocurrency as a gift, that is not a taxable event. However, if the recipient sells the cryptocurrency, that would be considered a taxable event.
-If you transfer cryptocurrency from one wallet to another, that is not a taxable event.
Based on the information above, it appears that transferring crypto is not a taxable event. However, this could change in the future and it’s always best to consult with a tax professional to be sure.