Posted by Income Taxes and Bookkeeping LLC

Cryptocurrency Tax 2020: What You Need to Know

Cryptocurrency Tax 2020: What You Need to Know

Do you own cryptocurrencies? Maybe you bought Bitcoin years ago when it cost $ 100 and decided to make big profits in 2021. Or perhaps you got into the revolution late and bought some Ethereum just to come back and sell it quickly. Either way, you may need to pay taxes on your cryptocurrency transactions this year, and you need to understand how your tax bill affects you.

How do cryptocurrency taxes work?

For better or worse, capital gains tax rules apply to cryptocurrencies such as Bitcoin and Ethereum. The Internal Revenue Service (IRS) treats all cryptocurrencies as equity and taxes them when sold at a profit.

This means that when you buy goods or services with cryptocurrencies, you owe capital gains tax if the crypto you spend has gained in value over what you paid to its origin.

Here's an example: If you bought $20,000 in Bitcoin in early 2020 and held it until the end of 2020, it would be worth around $ 60,000. Suppose you used the entire amount to buy a Ford car. You have to pay the $40,000 capital gains tax that you paid when you transferred that amount from Bitcoin to Ford. You might think you just spent your Bitcoins, but for tax purposes, you sold them to Ford for a profit (in exchange for a car).

In the meantime, if the value of your cryptocurrency investment has declined and you've sold it for dollars, traded for another cryptocurrency, or used it to buy a car (as stated above), you've seen a loss of capital. And you don't owe any tax on capital losses. You can use the losses to compensate for other income taxes.

Your cryptocurrency fees depend on how long you hold the cryptocurrency.

Your cryptocurrency tax account depends on the length of the hold and your total annual income.

• Short-term gains: If you held Bitcoin or Ethereum for a year or less, your income would be considered short-term capital gains taxed at the normal income tax rate.

• Long-term capital gains: Gains in cryptocurrencies held for a year or more are taxed as long-term capital gains, normally at a lower rate than most income taxes, based on annual income.

If you earn cryptocurrency by withdrawing it or receive it as a promotion or payment for goods or services, it is considered part of your normal taxable income. You owe tax on the crypto's full amount on the day you received it, based on the normal income tax rate.

And if you have the same cryptocurrency that you mined or earned from these companies, your value goes up, and you spend or sell later with taxes on profits, debt, and capital gains on profits, depending on the length of your holding. 

How to file your 2020 crypto taxes 

If there's ever been a time to get organized with your cryptocurrencies, it's now: The first question on the new Form 1040 2020 tax return is whether you've made any virtual currency transactions for the year.

If you answered yes to this question, here are a few things to keep in mind:

Keep track of all transactions.

You must keep track of all of your cryptocurrency transactions, including how much you paid for the cryptocurrency, how much you kept, and how much you sold, as well as the receipts for each transaction.

It may be easier said than done. Some individuals trade cryptocurrency thousands of times a year or more.

This can create unique record-keeping challenges, and it can be extremely difficult to file a tax return properly.

Suppose you are trading cryptocurrencies on a foreign currency or an investment platform. In that case, they can help you with the accounting, giving you all the data you need to store your cryptocurrencies on your own or with—help from a professional.

Use software to track crypto transactions.

If your investment or exchange platform is not tracking your cryptocurrency transactions, or if you trade through various means, you have options.

Software companies have emerged that will search your blockchain to detect transfers between wallets, whether in exchange or not, and provide reports on all wallet transactions you deliver to a particular wallet. 

Tools like Koinly and Cointracker connect to crypto exchanges and wallets to track your crypto transactions and fill out the forms necessary to store your crypto fees.

Fill out the appropriate tax forms.

Once you have registered your crypto transactions, you will need to complete a few tax forms, depending on how you used crypto:

  • Form 8949: This form records each purchase or sale of cryptocurrencies as an investment. This should include the total number of currencies, the day and price you bought, the day and price you sold, and the profit or loss for each trade.

  • Schedule 1: If you report cryptocurrency mining as a hobby, you will report this income on line 8 of Schedule 1. You will not be obliged to pay taxes on your own, but you will be more limited in what you can deduct as expenses.

  • Schedule C: If you received coins from mining, you must indicate whether you received them for work or as a hobby. If you have a cryptocurrency mining company, you must report this income on Schedule C and deduct your expenses. However, your expenses could be very high to offset on your own any additional taxes you would have to incur if you were considering mining rather than a hobby.

  • Schedule D: This form summarizes the total capital gains and losses for all virtual currencies investments, including crypto.

File your taxes

You can use online tax software to file state and federal tax returns. For those looking for comprehensive services, some of these tools offer a comprehensive set of accounting services to monitor and prepare for crypto and regular taxes.

Hire a professional

Preparing for taxes on cryptocurrencies can be difficult, especially since the laws around them are constantly changing. If you have earned considerable income from cryptocurrencies, it would be worth hiring a professional specializing in this type of tax work, so the IRS does not come after you.



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