The widespread adoption of cryptocurrency worldwide makes it easy for millions of individuals to engage in crypto one way or the other. As a result of the financial success associated with cryptocurrency, tax agencies or authorities now seek ways to obtain their share of the generated revenues across crypto activities such as trading, mining, and loan interests earned on decentralized finance (DeFi) platforms.
The entire financial world believed that crypto investors, traders and users were majorly tech-savvy. Due to this belief, there were no clear rules on reporting and paying crypto taxes. This didn’t make them report their crypto taxes because everyone believed that the tax authorities were still investigating crypto as sustainable financial innovation.
But authorities now work hard to establish cryptocurrency tax rules. It doesn’t matter if you’ve been trading for a long time or are new to the crypto world. You must report your crypto income and pay the taxes associated based on your local regulations. However, complications and confusion can come up while reporting or filing. This happens most especially if you do it at the last minute.
The best you can do is record every transaction you conduct in the crypto market. Likewise, understand the crypto tax law and know the tax implications associated with each crypto transaction. This guide answered various questions related to reporting and filing your cryptocurrency taxes.
When to Report Tax Returns on Crypto Trades
- Buying Crypto with Fiat Currencies
When you buy a crypto asset (such as Bitcoin, Ethereum and AABBG) with fiat currencies such as U.S. dollars and you keep it in a crypto exchange (such as Binance and AABB exchange), it doesn’t have any indication that you will pay crypto taxes by year’s end. You don’t need to report such crypto transactions if that’s the only crypto activity you engaged in throughout the year.
- Crypto Trading
The first point of crypto taxation is when you start using crypto as means of exchange. This means that exchanging your crypto for U.S. dollars, exchanging it for another crypto such as Bitcoin, Ethereum and AABBG or using it as a payment means for a good or service makes your crypto taxable. If you are a trader, you have to be more careful because every trade you place is subject to taxation.
- Minting or Trading Non-Fungible Tokens (NFTs)
Non-fungible tokens are unique digital items that are created and transacted on blockchain. This can be digital art or real estate tokens associated with physical real estate. And you can only buy NFTs on digital marketplaces such as OpenSea. Meanwhile, NFTs are taxed exactly as crypto taxation.
Taxing NFTs depends on whether you are an NFT creator or investor and your interaction level with NFTs (i.e., is it a business or hobby for you?). If you create or mint an NFT, the gas fees are taxable.
The profit you made from minting the NFT is a capital gain. As a result, you will file it as long-term or short-term capital gains tax. However, this depends on your holding period. But the capital investment is categorized as ordinary income if you are a professional NFT creator. The same taxation rules associated with crypto trading apply to NFT investors.
Why You Should File Crypto Taxes
The first and the most important reason you have to file crypto taxes is that paying tax is part of the law. And the best favor you can do yourself is to be on the tax authorities’ good side. Crypto used to be perceived as an unclear financial system, and regulators were against it because individuals and groups were using it for illicit activities such as money laundering and funding terrorism.
Although this is not peculiar to the crypto world, it has been happening across different payment platforms. But governments have deployed tools that leverage the critical component of blockchain technology, transparency. As a result, tax authorities now focus more on crypto, and they now request that crypto exchanges (such as the AABB exchange) send their reports.
Although you might not receive any crypto tax document yet, it doesn’t mean that you are excused from taxable events. You should report all your crypto trading activities, whether the crypto exchange report or not. Failure to do this yourself might cost you an audit. And nobody wants a tax audit, except it comes with a huge financial blow.
Can You Legally Avoid Crypto Taxes?
It is not advisable to avoid cryptocurrency taxes. This is because some countries have penalties associated with avoiding tax payments. However, it is noteworthy that some countries like the United Kingdom don’t tax you for buying crypto (such as Bitcoin, Ethereum, AABBG) with fiat cash like Great British Pound.
However, it is pertinent to record your crypto transactions. With this, you won’t have any difficulties accurately calculating your crypto gains and losses. But as a crypto trader, earning from your crypto trades are subjected to income tax after deducting the losses. But if you want to pay zero tax on crypto gains, donate crypto as a charity or send it to your family and friends as a gift.
But you must own the crypto asset for a year or more before you can send it as a gift. One effective way to dodge paying crypto taxes on your crypto gains is by sending it as a gift. The beneficiary will not be taxed since it is a gift.
How to File Cryptocurrency Taxes
Without considering the issues surrounding crypto taxation laws, we can critically look at how you can pay crypto taxes. Below is a step-by-step process you can follow to report and file cryptocurrency taxes.
- Gather a list of all your exchanges and transactions. With this, you will report all the relevant trades and transactions. This is different from the 1099s exchanges sent to you. It involves transactions wherein a sale, token exchange or using coins for purchases occurred.
- Calculate your capital gains and losses. In this step, you will deduct the cost basis of the crypto assets from the sale price when you were conducting the exchange.
- Fill out IRS Form 8949 for all crypto taxable events.
- Then, transfer all totals to Form 1040 Schedule D.
- Add other forms of crypto income to the tax return.
- For mining crypto as a business, fill out a 1040 Schedule C. But if mining is a hobby for you, file it as “other income” in 1040 Schedule 1.
- As for self-employment income, you will be taxed based on self-employment taxation rules.
Filing a cryptocurrency tax might be a simple task for some people. On the other hand, it can be complicated based on transaction types. However, crypto taxes become more complicated as much as you are active. But as a business operating with cryptocurrency, it is noteworthy that you hire the services of a tax professional. That way, you navigate complex issues easily and become more compliant. However, always record details of every trade or transaction you’ve executed.