A cryptocurrency wave has led to the rise of Bitcoin to over $30,000 per coin, with everyone scrambling for their share of the digital currency. However, if you are interested in cryptocurrencies, now more than ever is an excellent time to learn about its tax implications. Before 2020 federal tax forms didn't request cryptocurrency transaction details, but this year, it has been included, and the question to ask is, what does it mean for my income taxes?
Since 2014, the IRS has labeled virtual currencies as property, which means taxpayers are expected to report their crypto transactions as the U.S. Dollar on their tax returns. With this policy, you are expected to ascertain the market value of the virtual currency in dollars or any other fiat currency, and this requires a lot of intentional bookkeeping.
According to the IRS, tax implications could lead to liability for trading with digital currencies when paying for goods, holding them as an investment, or selling with them. Since the tax laws with cryptocurrencies were established in 2014, you may ask, "does this mean I have to pay crypto taxes from way back 2014 if I used it then?"
The answer to that question is yes! The IRS sent tax letters to taxpayers who deal with cryptocurrencies to file for amended taxes and payback returns. A new IRS form was also released in the 2019 tax year that asks if taxpayers received, sold, sent, or exchanged virtual currencies that year.
The IRS also considers virtual currencies as capital assets adjust as you pay taxes when you sell your home or stocks; you are expected to pay capital gains taxes. If you had virtual money for a long time, you must pay long-term taxes, which applies to short-term investments as well.
How to calculate cryptocurrency as a capital gains tax
The capital gains taxes are calculated like this: you consider your cost basis, which is the amount you paid for the currency, and determine how much it has risen and fallen since your purchase date. Depending on your taxable income, your capital gains rates can range from 0-20%.
Cryptocurrency transactions are detailed on form 1099-B and form 1099-k or the tax statement sent to you by your crypto exchange. The exchanges are not expected to send the forms, so don't worry if you don't get them. Just ensure you keep track of your transactions by always downloading your trading history from the exchange's website.
If you trade with or invest heavily in cryptocurrencies, you must do a periodic check on your trading history to have the information when filing your taxes.
What the IRS considers as taxable cryptocurrency event
When you receive money in cryptocurrencies
If you purchase goods and services using virtual currency
Trading one cryptocurrency with another digital currency
If you convert digital currency to a fiat currency like the U.S. Dollars
In some cases, it is possible to offer digital currency as a gift, transfer currencies between crypto wallets or exchanges, and purchase with the dollar without having a "taxable" situation. But if you have multiple taxable events, you have to monitor your trading history and seek help from a crypto tax expert to unravel how you are getting taxed.
Although still mostly volatile, cryptocurrencies are becoming a vital part of our financial system, with most people preferring the decentralized and secure pathway for transactions. Now you understand the concept of crypto taxes and the IRS's expectations on this choice of a financial transaction.
FOR MORE INFORMATION OR TO MAKE AN APPOINTMENT, PLEASE CLICK THE BLUE TAB ON THIS PAGE.
THANKS FOR VISITING.
Cypress Tax Solutions