Cryptocurrency Tax Guide: A Beginner’s Guide to Filing

Cryptocurrency Tax Guide: A Beginner’s Guide to Filing

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Cryptocurrency Taxes Understanding Cryptocurrency Taxes

There are millions of Americans who are getting involved with cryptocurrencies in one form or another as they continue to be embraced throughout the financial world. Unsurprisingly, with the success of cryptocurrencies comes tax authorities, who are eager to collect their share of income from activities such as cryptocurrency trading, mining, and interest earned through decentralized finance (DeFi) platforms. ).

However, it seems like it wasn’t that long ago that cryptocurrencies were a niche field that only involved especially tech-savvy people. In those days, the exact rules for filing and paying taxes on cryptocurrencies were unclear. 

Many who used the various currencies did not even bother to report because cryptocurrencies were still believed to be under the radar of most tax authorities. However, the authorities are catching up and it is time to recognize that they are now working hard to establish tax rules on cryptocurrencies.

Whether you are new to cryptocurrency trading or have been doing it for some time, you must report your income and pay applicable taxes according to local regulations. That said, it can be complicated and confusing. It can be even worse if things are left until the last minute. If you participate in the market in any way, you should keep records and try to understand the crypto tax law and the tax implications of each transaction.

In this article, we will answer various questions such as should I file taxes for cryptocurrencies? How to report cryptocurrencies in your taxes? How do I withdraw crypto without paying taxes in the US?

Why You Need to File Crypto Taxes

The first reason you need to file crypto taxes is that it is the law, and it is always best to stay on the good side of the tax authorities. In the early days, many viewed cryptocurrencies as a financial gray area, with regulators accusing them of being used for illicit transactions and to hide income or launder money. 

As with any other means of payment, this still happens in the world of cryptocurrencies. However, governments have now begun to implement tools that make use of one of the core features of blockchain technology: transparency.

While reporting by exchanges falls short of the very high standards associated with more conventional investments like stocks, compliance is increasing with each passing year. Authorities are targeting cryptocurrencies more than ever and are starting to demand more reporting from exchanges. The United States Internal Revenue Service (IRS) is also seeking a budget increase that would strengthen crypto tax enforcement.

Even if you haven’t received any tax documents associated with cryptocurrency trading, that doesn’t mean you don’t have any taxable events. You must report all of your activities, regardless of whether you think the exchange reported them or not. If you don’t, you could be subject to an audit.

Can taxes on cryptocurrencies be legally avoided?

Taxes on cryptocurrency transactions should not be avoided. You should understand that you do not pay tax when you buy cryptocurrencies with fiat money in the UK, such as the British pound. However, you need to keep track of your crypto transactions to keep track of your cost base in detail. This ensures that you can calculate your crypto profits and losses accurately in the future.

If you buy and sell cryptocurrency on a regular basis or as part of a business that trades cryptocurrency, your trading profits will be subject to income tax instead of capital gains tax after losses are deducted. If you still want to know how to pay zero tax on cryptocurrency earnings. Offer cryptocurrencies as charity or gift to your relatives.

If you itemize your deductions, you may be able to deduct donations to a qualified charity. However, before giving an asset, you must have owned it for at least one year. Also, giving cryptocurrency as a gift could help you avoid paying taxes on your winnings. There will also be no gift tax for the beneficiary.

Cryptocurrency earnings are treated as capital gains income

. If you’ve ever made a profit and paid taxes on traditional capital assets like stocks or bonds, some of the tax issues associated with cryptocurrencies will be familiar to you, and that’s because the IRS treats cryptocurrencies like property. So how do you report crypto transactions to the IRS? If you make money from crypto, you will pay taxes on capital gains in a similar way to paying taxes on gains from stocks or bonds.

Take the selling price of the asset and subtract the cost basis – the difference represents the amount of profit you made from trading a particular cryptocurrency. From there, your cryptocurrency tax liability will depend on whether you held the coin for less than a year or more than a year.

If the holding period was less than one year, you pay short-term capital gains tax, which can range from 10% to 37% in the United States, depending on the tax bracket you’re in. for more than one year, is subject to the more favorable long-term capital gains tax. The long-term rate can be 0%, 15%, or 20%, depending on your tax bracket.

Crypto taxes cover more than just investing

Think you’re free because you didn’t trade crypto as an investment? Think again. All types of cryptocurrency uses are taxable. Even if you are just a consumer using your coins to make purchases, this should be reported on your tax return. Even exchanging one cryptocurrency for another is something that needs to be reported.

Let’s say you are buying cryptocurrency and using it for simple purchases. It may not seem like a form of income, but to the IRS, it is. If you bought those coins and the price went up, allowing you to get more of that money, it’s technically a capital gain. You need to report and you need to pay taxes on it.

Those who are paid in cryptocurrency for their work must also report the income to the tax authorities. One way to make income reporting easier is to get paid in cryptocurrency and then exchange the cryptocurrency for dollars. You can then report your personal income in its dollar value. If you choose to keep the coins and allow them to gain or lose value, that could complicate things for tax reporting purposes.

If you’re making money through cryptocurrency mining, that’s another concern. Rather than capital gains or personal income, it’s probably business income. That said, there are different issues that can arise when reporting crypto mining income, but more on that later.

Can the IRS track cryptocurrencies?

One sign that the IRS is beginning to track cryptocurrency income is that it is explicitly asking taxpayers on Form 1040 if they engaged in any cryptocurrency activity. The form asks if you received, sold, sent, traded, or acquired an interest in any virtual currency. This may seem like a small thing, but it has big implications.

In particular, the IRS seeks to obtain a truthful answer regarding such forms of income. If you lie, it can have serious consequences that go beyond simple tax compliance issues. The statements you make on your tax returns are made under the possible penalty of perjury. If you lie when answering this question, you could be subject to fines or other penalties.

However, the IRS guidance is that you do not have to check “Yes” if the only type of transaction you have made has been buying cryptocurrency with dollars. That said, you will need to keep records of those transactions to record your cost basis in case you do other types of transactions with the cryptocurrency you purchased.

Crypto mining has unique tax issues Crypto

mining income is different from the income that can be earned from investing. Rather than a capital gain, mining income is treated more like business income, meaning you would pay taxes on the profits. 

If you have a crypto mining business, the fair market value of each coin mined would be considered income. As a business, you can also deduct certain costs that are used to generate income. For example, you may be able to write off mining equipment costs.

However, the fact that you are mining does not make the activity a business. Joining a mining pool to earn some money may not count as a business. Instead, this could be considered hobby income. In this case, the tax implications are different. One important difference is that you cannot deduct hobby expenses from hobby income to reduce your tax liability.

Can crypto losses be written off?

Nobody wants to lose money when trading, but it can be a way to reduce taxes on cryptocurrencies. Like stocks and other more conventional investment instruments, you can take a capital loss deduction.

If you have capital losses, you can offset some of the capital gains by reporting them on your tax return. This is one case where cryptocurrency tax laws can be beneficial. As a cryptocurrency investor, you can claim up to $3,000 per year in capital losses. If your losses in a given year are more than $3,000, you can carry the rest over to future tax returns to count against any gains you may make.

Additionally, donating to charity with cryptocurrencies can also help you reduce taxable income, as well as support a cause that is very important to you. However, there are limits on how much can ultimately be deducted from your income.

Do you have to pay taxes on cryptocurrencies if you don’t withdraw money?

It may seem like there is a cryptocurrency tax on everything, but there are some exceptions. While you do have to pay taxes on personal income, capital gains, and business income from cryptocurrencies, there is a short list of transactions that will not incur a tax liability.

As mentioned above, the purchase of cryptocurrencies is not a taxable event in itself. Even if the value increases, you can buy and hold crypto without paying taxes. Because there is no immediate gain or loss from owning cryptocurrency, it is not subject to tax. However, it has tax implications. 

Only when you sell the asset and get cash or units of another cryptocurrency do you have to pay taxes – you have “earned” the profit and have a taxable event at this point. Eventually, you will need to report the purchase if you ever sell, trade, or use the crypto currencies you purchased.

Moving your coins from one exchange to another or between wallets is not subject to tax. You already own the coins and are not selling them for a profit by simply moving them to a new exchange. That means you don’t need to report the simple movement of coins between exchanges or wallets.

If you receive a gift in cryptocurrency, there is no tax on that. That said, if the gift is more than $15,000, then you must pay taxes on it. If you decide to sell a crypto gift valued at more than $15,000, you would use the same cost basis as the person who originally bought the coins.

Giving a donation in cryptocurrency is another situation where the transaction does not incur a tax. If you donate cryptocurrency, you must record the transaction at the fair market value of the coins at the time of the donation.

How to file crypto taxes?

Now, with some of the issues related to cryptocurrency tax laws, we can see the process of paying cryptocurrency taxes.

Cryptocurrency taxes can be simple for some people, but can be confusing and complex depending on the types of transactions. In general, the more active you are, the more complicated crypto taxes become. Also, actions that may seem simple can have significant tax implications. Simply buying a cup of coffee with Bitcoin (BTC) can have tax implications.

If you have a business that operates with cryptocurrencies, it might be beneficial to pay for the services of a tax professional who will be able to help you navigate the most complex issues and keep you compliant. Regardless of whether you hire a professional or not, you must keep detailed records of every trade and transaction.

Related: A Beginner’s Guide to Filing Cryptocurrency Taxes in the US, UK, and Germany

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