Bitcoin and other cryptocurrencies are becoming sensational daily. There is widespread adoption within the global community, but the government is not sure of its involvement. However, they won’t stop at establishing vital regulatory policies. Likewise, they are establishing crypto taxability while some individuals think they can evade tax via crypto.
That is why it is important to examine crypto taxation and understand how you can report crypto tax. This guide is compiled to guide you through.
Is Crypto Taxable?
Due to the ongoing debate of the government’s perception about cryptocurrency, many individuals believe that taxation may not be achievable because there are fewer regulations on crypto when compared to fiat currencies. As a result, many believe that crypto investment and transactions are a genuine way to avoid taxes. However, the opposite is the case. You can’t avoid crypto taxation.
An instance is the U.S. government pushing for having crypto transactional records from crypto exchanges to the tax agency, the Internal Revenue Service (IRS). This will not only give this authority access to crypto users’ transactional activities. This access will enable them to strengthen the system while obtaining appropriate taxes from crypto users.
Crypto taxation is possible because the federal agency considered it a capital asset. As such, it is a “property” under income tax purposes. This explains that the taxes you pay on crypto are similar to those you pay when you exchange a capital asset. You record either your transactional gain or loss exactly like you will record for a stock or bond purchased.
The explanation above reveals that your crypto investment is taxable when you sell it, exchange it for another coin, mine it, or use it to pay for goods or services. Likewise, you can record a capital gain depending on the holding duration. Thus, crypto is taxable, and be ready to fill your crypto taxes.
Why Taxing Cryptocurrency?
Crypto taxation is an important discourse because of the different speculations surrounding the acceptance of crypto as an asset and a payment option. However, taxing cryptocurrency is similar to taxation that happens across the financial system. Meanwhile, it is a tool to ensure that individuals do not engage in illicit economic activities.
An important reason for this is to ensure that citizens help uphold a good economic state and aid the government’s efforts to create sustainable living. Thus, it is important to file every crypto transaction taking place in your crypto wallet.
How You Can Report Crypto Tax During Filing: Steps Involved
Paying taxes is important regardless of the kind of business you deal in and the classification of your assets. That is why crypto is not left out on the taxation train. Now, it is established that your crypto assets are taxable based on four things; buying or selling, exchanging for another crypto, mining, and using them as a payment option.
Meanwhile, understand that your crypto assets may be tagged as ordinary income tax or capital gain tax, depending on the holding period. Income tax is for a short period, while capital gain tax is for a long period. The next step is to create a process that will make your tax filing easy when the tax season approaches. As a result, we examined the important indicators for preparing for the next tax season.
- Be responsible for keeping your crypto transactional records.
Despite the demand from the IRS that crypto brokers and exchangers should produce transactional reports for taxes to the federal agency, these institutions do not have any obligations to provide their users with such records. Although a few—like Coinbase—are creating this report. It is the market participant’s responsibility to keep a record of his crypto dealings.
Keeping records of your crypto dealings has a long-term taxation benefit. That is because you do not want to increase your tax liability load. An instance is when you get paid for a service at a certain price and want to file for your taxes when the crypto price doubled already. If you hadn’t recorded your crypto deposit from then, you might be taxed at the current price.
An instance is when you were paid $2,000 worth of Bitcoin for a service. And two years later, you want to file for tax, but the current price is about $4,000. That is two times the original price. Your responsibility mandates you to show important references that you received the Bitcoin when they were $2,000. Otherwise, your tax burden will spike because you will be assessed at the current price.
Likewise, it would help if you recorded payment endeavors made via the crypto payment option. Say you ordered pizza, and you paid with crypto. It would be best to record it because it is pertinent that you record the dollar equivalent at that time. Thus, your tax liability will have an appropriate input.
- Understand crypto taxation
To establish a good record standing, you must understand the different kinds of crypto dealings you are involved in. This helps you categorize your transactions properly and place each deal in the appropriate column.
As a result, two possible scenarios may occur when engaging in a crypto dealing. For instance, any crypto asset received as payment for products or services qualifies for an ordinary income. And the holding period doesn’t affect the tax rate in this case. Another possible income tax scenario is assets obtained from crypto mining. This may also be regarded as self-employment tax.
Meanwhile, your crypto assets may qualify for investment income tax if they are bought and held for a period before selling them. If you do this under a year, you will record it as ordinary income. But profits from them after a year will be perceived as capital gains.
- Record your crypto loss
As much as you record the gains obtained from your crypto dealings, record your crypto losses. These crypto losses are vital in helping you to reduce tax on capital gains. However, there are established rules for this.
- Record possible tax reduction efforts
If you are looking to reduce your crypto tax liability, you should consider accounting for activities that may help you. An example is a crypto donation to charities or foundations. When you engage in a crypto donation, you may be eligible for tax liability reduction. But you may not qualify for the deduction if you sell the token before donating the dollar equivalent.
- Report your crypto income
Reporting your crypto income appears last on the list because your acquired knowledge of how to categorize your crypto transactions will help with this action. However, your crypto dealing determines your crypto income type. Thus, place them in the right columns under the appropriate headings.
FAQs about Crypto Taxation?
· Must I pay taxes for crypto received as a payment option?
Yes, you will pay taxes for crypto received as payment for goods and services. Such crypto payments are regarded as ordinary income. Thus, the tax value is pegged on the crypto price on the day you received it as payment.
· Must I pay taxes for crypto mining?
Yes, you pay taxes for mining cryptocurrency. Your tax value is pegged at the price of the coin while you mined it. However, you can reduce tax costs if you are into the crypto mining business by factoring in the equipment and resources maximized during the process. But you cannot do that for personal crypto mining.
· Must I pay taxes for buying crypto to hold only?
You don’t have to include this in your tax filing. That is because you only purchased to invest in crypto. However, it may qualify for taxation if it brings dividends or interests.
· Must I pay taxes for crypto donations?
Crypto donation or gifting is regarded as cash donations. As a result, they offer you a tax deduction opportunity. You don’t have to pay any tax on the gain acquired while donating cryptocurrency as a donor.
· What is my state crypto taxability?
As of the moment, the states are not addressing cryptocurrency like the federal government has been doing. But it is critical to check with the state department to know about existing crypto tax rules. However, a larger percentage of the states would want to follow the federal lead on this case.
Are You Prepared for the Next Tax Season?
Now that you know how to tax your crypto activities, it is important to start preparing for the next tax season. That is because you don’t want to receive a surprising tax call or get fined for not recording your crypto dealings appropriately. Convincingly, this guide has helped you understand how you can do that. Now, go ahead and prepare your tax records for the next tax evaluation.