Do You Have to Pay Taxes on Cryptocurrency?

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Tax season is coming soon. If you have been actively buying and selling cryptocurrency in the past year, you may be wondering if you should report and pay taxes on virtual currency. How long will you own the cryptocurrency?

Cryptocurrency grabbed its place in the headlines as Bitcoin continued to do well in 2021, with Double the pricing end of the year. This has led to cryptocurrency becoming an even more important part of the financial portfolios of investors, consumers and large corporations. This also means that there are now guidelines for reporting and paying taxes on cryptocurrency.

Since digital currency is not very well regulated, it is helpful for you to understand the tax implications of buying, selling, and using before you dive in. Even if you or your business has been dealing with cryptocurrency for a while, it is helpful to remind yourself what to report. This article aims to answer questions about crypto taxes.



How are cryptocurrencies taxed and reported?

The IRS considers any type of cryptocurrency to be a type of virtual currency. This includes the likes of Bitcoin, Dogecoin, Ethereum and other currencies that may have escaped the limelight.

If you exchange, sell, or use crypto to purchase goods and services, you will need to report your winnings. The new IRS Form 1040 (Federal Annual Tax Return) now includes a section that asks if you received, sold, sent, exchanged, or received virtual currency.

Let’s say you have purchased any form of virtual currency with real money, whether it is personal or through your business, you would answer “No” to this question. However, if you obtain any form of virtual currency through mining, you will have to answer “yes” as this value is taxed immediately.

You also need to report some of the gains on Form 8949. For example, if you buy bitcoins for $1,000 and later sell them for $1,500, you will have a gain of $500, which is the amount you have to pay taxes on. However, if you sell these bitcoins for $500, resulting in a loss of $500, you can deduct those losses to offset the capital gain.

How are taxes on cryptocurrency calculated?

To determine how much to report in profit or loss and how much tax you have to pay, you must first know the value of the virtual currency in US dollars. This value, including any fees paid, is known as the cost basis. Compare this with the price when you sold or spent the currency to calculate your tax liability.

But this is not the only step. You also need to calculate the length of time you have held this asset. This will determine the type of capital gain or loss. Depending on how long you have held your cryptocurrency, your gains or losses will be divided into two categories known as “short-term” or “long-term”. Here’s how to distinguish between the two:

Short-term

Short-term capital gains or losses refer to the assets you own over a period of 365 days. This crypto tax rate is similar to standard income rates, which range from 10% to 37%, similar to ordinary income such as salaries, commissions, or commercial side.

long-term

Long-term capital gains or losses refer to assets you owned for more than a year before selling. Depending on your income, these are taxed at a lower rate ranging from 0% to 20%.

We mentioned earlier about discounting your losses to offset your capital gains. This compensation can only be made for gains and losses of the same kind. For example, short-term losses will first cut your short-term gains. Any remaining net losses can be used to offset various capital gains.

If you have residual capital losses, they will be used to offset up to $3,000 in ordinary income. After that, any remaining capital loss will be carried over to next year.

What happens if you don’t report your cryptocurrency transactions?

Many people do not realize that they may be liable for crypto taxes. This is because you may not necessarily receive basic shapes It explicitly tells you how much taxes are paid and owed.

While some cryptocurrency exchanges will generate reports to assist with tax reporting, this service is not always available. It is your responsibility to track all your transactions and properly report crypto gains and losses.

Like normal transactions, failure to report cryptocurrency transactions can result in penalties, benefits, and IRS scrutiny. The IRS will not view any oversight of tax reporting or payment as an outright error, even if you are not familiar with the requirements.

While cryptocurrency is secure in many other aspects, that does not mean that it is anonymous or untraceable. The IRS Fraud Office works with private organizations to identify individuals who attempt to fraudulently avoid reporting crypto gains.

Cryptographic tax calculators and software

Reporting and calculating how much cryptocurrency taxes you owe can be daunting and confusing. To make sure you stay on the right side of the rules, keep track of all your transactions and record if it’s for safekeeping. While you can hire a third-party vendor or custodian to help you out, other options available include crypto trackers and online calculators.

There are many crypto tax software or cryptocurrency wallet trackers to choose from. These trackers allow you to connect multiple exchanges and virtual wallets to help you track the total amount and value of your cryptocurrency. some of the Best crypto tax software The calculators include:

  • Bionix It is a 24/7 trading platform that offers 16 free trading robots.
  • paper block It allows users to buy, sell and view their investments across multiple exchanges.
  • Coinstats It provides real-time price updates and supports the most popular cryptocurrency platforms such as Coinbase and Binance.
  • delta It is an investment tracker that allows you to track cryptocurrencies and other investments, including stocks and mutual funds.
  • TurboTax It is an online tax preparer that can support more than 2000 cryptocurrencies simultaneously.
  • tax law It is an alternative online tax preparer that supports crypto tax reporting and calculations.

The Big Picture…

Yes, you must pay taxes on any virtual currency you buy, sell, trade, or belong to me. Taxes will also apply if you use cryptocurrency to pay for taxable items. Wages, commissions, or income from side business is considered taxable income and must be reported.

Remember that all cryptocurrency transactions must be converted into US dollars before reporting. To make sure you don’t inadvertently make a mistake with your crypto taxes, carefully keep track of your crypto transactions, and immediately record them for safekeeping.

Photo: Depositphotos


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