Taxes come with various uncertainties. Unfortunately, crypto is not exempted from taxes. Crypto is traded on various exchange platforms and is widely accepted as a means of financial exchange. Cryptocurrencies also have taxes, which are known as crypto taxes.
According to the IRS, crypto is considered a holding. This means that virtual currency is taxable like other assets, such as gold and stocks.
Cryptocurrency has taken over the world’s financial system. Young and Invested put the number of people with a crypto wallet at 70 million globally. The number of people using crypto credit cards is also growing, and people are making lots of money selling NFTs (non-fungible tokens).
The implication is that these factors have raised tax positions that were usually unconsidered. Now, buying NFT coins with Bitcoin requires tax.
Crypto transactions are taxable, whether you are a new trader or have been in the system for a long time. So, it is crucial that you understand how crypto tax calculations work and how to report all your crypto tax returns.
Taxes When Trading Cryptocurrency
As of now, you have to pay tax when trading your cryptocurrency for fiat. Crypto taxation is not just limited to this, however. This is because cryptocurrency has been seen as property just like stock. So you will have capital gains or losses, which all have to be included in your taxes.
In line with IRS Form 8949, you have to report:
- Selling cryptocurrency for cash.
- Trading one cryptocurrency for another.
- Using cryptocurrency to purchase goods and services, whether with a crypto debit card or not.
The financial adviser and founder of RE|Focus Financial Planning, Daniel Johnson, also states that when selling an investment or exchanging one investment for another, a taxable transaction occurs.
Also, one has to be careful when trading lots of different cryptos. This is because when entering and exiting various cryptocurrency trades, there is a taxable event every time you place a trade.
Report Cryptocurrency Earned as Income On Your Tax Return
If you receive cryptocurrency as payment for service rendered, you have to report it on your tax return. It includes receiving cryptocurrency as income in place of cash, staking or mining bitcoins, receiving coins as tokens or rewards, and getting paid in bitcoin.
Regardless of how you earned the crypto, when it is received, record it on your tax return.
Pat White, co-founder and CEO of Bitwave, puts it this way: “If I get paid one Bitcoin for services, I have to grab the fair market value for that Bitcoin at the moment I receive it. Right now, if Bitcoin is at $54,000, I have to record $54,000 of revenue as personal income.” Remember to record your earnings at the right time in case the price of Bitcoin fluctuates.
Crypto Tax Rates Depends on Your Holding Period
The amount of crypto tax you have to pay depends on your assets holding period and annual income. For instance, if you hold an asset for less than a year, it means your crypto gains tax will be calculated as a short term capital gain. It is also calculated as your normal income, which is in the range of 10 to 37%.
But if you hold the crypto-asset for more than one year, the tax will be charged as a long-term capital gain and at a range of 0 to 20%.
The Wash Sales Rule Doesn’t Apply to Crypto
Cryptocurrency is a great way to gain wealth over time and save money on taxes. This is achievable as the wash sales rule is not applicable on cryptocurrency.
The wash rule implies that taxpayers are not allowed to deduct allowable losses, especially if the loss is from sales, stocks, or securities.
So, you can take advantage of this by removing taxable gains using investment losses. It also allows you to immediately buy back the same asset and maintain your position in the market.
Not All Crypto Activity Requires Tax Payment
Having crypto doesn’t mean you always have to pay taxes. If you purchased crypto and haven’t used it, you will not have any tax activity to report. Some nontaxable crypto activities are:
- Transferring assets from one exchange to another.
- Purchasing crypto.
- Donating cryptocurrency. In fact, this leads to tax deductions.
- Gifting crypto, although it applies only when it is in little quantities.
Buying a virtual currency with USD, you don’t have to state this in your tax report following the guidelines of Form 1040 tax return.
Lack of Crypto Tax Report
Failure to report your tax returns will bring an Internal Revenue Service audit. This is because the IRS sees virtual currencies as property. If you have received, sold, exchanged, sent or collected any financial interest in any virtual currency in 2020. If you have done any of the following, record your tax returns in the right form.
More so, lots of crypto exchange platforms are beginning to report cryptocurrencies activities to the IRS with the 1099-B Form. In other words, the IRS is already aware of some of your crypto activities. So it is better to pay your taxes and report accurately.
How To File Crypto Taxes
- Step One—Get the list of all your transactions, including the 1099 forms given at any exchange platform.
- Step Two—Calculate your capital gain and loss. To calculate your profit and loss of each transaction, take record of the price change of your assets from the time you received them.
You can use this formula:
Capital Gain/Capital Loss= Value at Time of sale – Cost Basis.
Note that your capital gain and loss for important crypto transactions should be reported in Form 8949.
- Step Three—Go to the IRS Form 8949, and fill in the capital gains and losses of all your taxable events.
- Step Four—Transfer the total from your IRS Form 8949 to Form 1040 Schedule D.
- Step Five—Finally, on the 1040 Form, fill in any other cryptocurrency transactions from staking, mining, airdrops, and income.
Wrapping it Up
It is crucial to pay attention to your taxes, especially as a virtual currency trader and ensure you aren’t audited by the IRS.
You can also make strategic trades in loss positions which will also help to reduce your tax rates.
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