Crypto Taxes: What You Need to Know Before Filing
The emergence of cryptocurrencies as a new asset class has brought to light the question of taxation. While the decentralized nature of cryptocurrency can make it confusing to file taxes on them, the IRS has made it clear that you need to pay taxes on your cryptocurrency gains. In this article, we will look at the key points you need to know before filing your crypto taxes.
1. What are Cryptocurrency Taxes?
Cryptocurrency taxes are just like any other taxes you pay. You pay taxes on the gains that you make from trading cryptocurrencies, and the tax rate depends on the tax bracket you fall into. These taxes are imposed by the IRS as per the tax code 26 U.S. Code ยง 61.
2. How are Cryptocurrency Taxes Calculated?
Cryptocurrency gains or losses are determined by the difference between the acquisition cost of the cryptocurrency and the proceeds received when the cryptocurrency is disposed of. It means that you will have to calculate the cost of the cryptocurrency when you acquired it and the price you received when you sold it. The difference between these two figures will be considered your gain or loss.
3. What is a Crypto Taxable Event?
A taxable event in cryptocurrency is defined by the IRS as any event that triggers the realization of a gain or a loss. This includes selling cryptocurrency, trading cryptocurrency, converting cryptocurrency into another cryptocurrency, receiving cryptocurrency as payment for goods or services, or earning cryptocurrency as mining rewards.
4. Short Term Vs. Long-Term Gains
Cryptocurrency taxes are based on the duration of holding the cryptocurrencies, which is either short or long term. Short-term gains are made when you hold the cryptocurrency for less than a year. Long-term gains are made when you hold the cryptocurrency for more than a year.
5. How are Crypto Taxes Paid?
Crypto taxes are paid in USD, and you need to use the average exchange rate on the date the crypto was disposed of. Cryptocurrency exchanges are not currently required to issue 1099 forms, and so it is up to you to keep track of your gains and losses and report them on your tax return.
6. What if You Don’t Report Your Crypto Taxes?
If you don’t report your crypto taxes, you could face penalties and interest charges. The IRS considers not reporting your cryptocurrency gains to be tax evasion, and you could be fined up to 75% of the underpayment.
FAQs
1. Do I need to report every cryptocurrency transaction on my taxes?
Yes, you need to report every cryptocurrency transaction that led to a taxable event.
2. What happens if I receive cryptocurrency as payment for goods and services?
You will need to convert the cryptocurrency value into USD and pay taxes on the converted value.
3. Are mining rewards taxable?
Yes, mining rewards are considered taxable income.
4. Are there any exemptions or deductions for crypto taxes?
There are no specific exemptions or deductions for crypto taxes. However, if you suffered a loss while trading cryptocurrencies, you can offset the loss against your gains and reduce your tax liability.
5. How do I keep track of my crypto taxes?
You should keep track of all your crypto transactions and the fair market value of cryptocurrencies. You can do this using a spreadsheet or cryptocurrency tax software.
Conclusion
Filing cryptocurrency taxes can be complicated, but it’s essential to pay them to avoid penalties and interest charges. Keep track of all your crypto transactions to make filing easier, and use cryptocurrency tax software to assist you. Remember, in the eyes of the IRS, cryptocurrency is no different from any other asset class, and taxes must be paid on all taxable gains.