Cryptocurrency is similar to other asset when tax is implied. Sadly, filling cryptocurrency taxes is a complex task and very few people file them. Lots of people see cryptocurrency as a means to move money illegally – for avoiding cryptocurrency taxes entirely.
After the Internal Revenue Service (IRS) issued guidance on virtual currency to taxpayers in 2014, there has been almost no other legislation or guidance put forward. it’s very important to pay cryptocurrency taxes. Here’s how to approach cryptocurrency this upcoming tax season.
Here is a quick fact: All cryptocurrency trades and sales are taxable. You need to report all your profits and losses on all individual trades to the IRS.
The IRS is increasingly focused on crypto taxes.
Table of Contents
What happens if you don’t pay cryptocurrency taxes?
Like any other type of tax fraud, not paying cryptocurrency taxes can result in a maximum sentence of five years in prison or a maximum fine of $250,000.
Two main types of cryptocurrency taxes.
According to the IRS’ Guidance on Virtual Currencies, cryptocurrency is property, not currency. This means that you have to pay capital gains tax.
Capital gain taxes are of two types: long-term and short-term. Long-term means that you possess a currency for over a year before selling or trading it, while short-term appeals to cryptocurrencies you’ve had held for less than a year. These rates vary depending on your state and your tax bracket, though long-term capital gains tax is typically lower.
Crypto can also be subject to income tax. This is when you’re paid in cryptocurrency by an employer, and your crypto is classified as earnings. You pay the same amount in crypto income tax as you would in USD.
Altogether, employees and employers have to give a detailed report cryptocurrency earnings and withholdings.
Crypto taxes needs two tax forms.
Mostly all of investors interested in cryptocurrency taxes are investors. In a way, they use Sales and Other Dispositions of Capital Assets Form 8949 to report on digital trades.
This is where the investor gives details of the assets they’ve traded, the dates they acquired and sold it, the cost of doing the trade, how much they made, and their net gain or loss. The form also differentiate between short-term and long-term capital gains and losses.
The second form regarding crypto trades is Form 1040 Schedule D. This one covers your total short-term and long-term gains and losses, going off information from Form 8949.
Cryptocurrency miners have to pay taxes, Yes! you heard it right
Cryptocurrency miners need to pay taxes on their income, because their cryptocurrency is subject to income taxes. Also, mining is certified as self-employment. Miners have to pay around 15.3% of self-employment tax. They can also reduce expenses, such as electricity and miscellaneous.
Not everything crypto-related is taxed, Yes! some good news
You aren’t taxed for just purchasing and holding cryptocurrency. In simple words, you need to sell or trade in order to be subject to taxes.
Generally, capital gains taxes for crypto functions, as it does for other assets: If investors lose money on your cryptocurrency trades, they can claim a loss and save on capital gains taxes.
Cryptocurrency tokens are potentially tax-exempt.
In the year 2014, the IRS last updated its instructions and guidelines on cryptocurrency taxes. Since then, many things have changed in the cryptocurrency space. In a way, there is a theory that tokens—cryptocurrency that represents a service or asset, not a currency—are not subject to federal tax laws.
This is because the IRS defines taxable crypto as “virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency.” Tokens can theoretically speaking, tokens does not fall in this category.
Hence, the right decision would be to consult with a certified accountant or lawyer before making any decisions regarding cryptocurrency taxes.
Cryptocurrency taxes are still in flux.
Paying cryptocurrency taxes is similar to paying any other type of income tax, except for one big factor: It’s generally up to the investor to collect the information himself. Meaning, going through thousands of trades, keeping a record of the necessary data, and doing all the process again next year.
Additionally, there are many things we aren’t aware about the system of cryptocurrency taxes yet. For example, the IRS’ status on cryptocurrency airdrops and tokens remains unclear.