Cryptocurrency is the Wild West of investing. These digital currencies are not only intangible, but their unpredictability makes trading and investing in them sound more like a video game than a legitimate asset class.
Tax season is here, which suggests it’s time to review your financial records and reconcile your incomings and cash outflows. When it comes to digital currency assets, taxation is a complicated topic. The regulations governing crypto reporting by the Internal Revenue Service (IRS) are continually changing.
This, along with the speed with which transactions can take place, may give the impression that filing cryptocurrency taxes is a time-consuming operation for both traders and investors.
How does cryptocurrency get taxed?
Although Bitcoin is recognized in an increasing number of establishments, tax authorities do not recognize it as a currency. Every cryptocurrency and stablecoin accessible on exchanges, including Dogecoin and Litecoin, is affected in the same way.
While bitcoin is not cash, every cryptocurrency transaction (such as a sale or exchange) is taxed. Under current IRS criteria, virtual money is treated as property for federal tax reasons.
This means that any tax concerns that apply to real estate transactions also apply to bitcoin transactions.
What is the bitcoin tax rate?
Gains are entitled to income taxes ranging from 10% to 37%, relying on your total earnings.
If you retain your bitcoin for more than a year before trading it, your tax status will improve. The second tax is a long-term capital gain tax, which is normally imposed at significantly lower rates of 0 percent, 15%, or 20% for high-income people.
How to Declare Bitcoin on Tax Forms:
Submitting bitcoin gains and losses is comparable to registering gains and losses from stock or other sorts of property investments. To file your bitcoin taxes, complete the five procedures below:
- Calculate your bitcoin profits and losses.
- Complete IRS Form 8949.
- Fill out Form Schedule D with your 8949 totals.
- Incorporate any cryptocurrency profits.
- Complete the remainder of your tax return.
Calculate your bitcoin profits and losses:
When you sell your bitcoin, you will experience capital gains or losses. Keep track of how the worth of each of your assets has altered since you initially acquired them to assess your gain or loss from every transaction. You can use this given formula:
Capital Gain/Capital Loss = Value at the time of sale – Cost Basis
Then, on Form 8949, disclose your capital profits and losses from bitcoin transactions that qualify.
Fill out Form Schedule D with your 8949 totals:
The IRS Form 8949 can be used to document capital asset purchases and sales. Capital assets include shares, bonds, and, yes, cryptocurrency.
While capital gains and losses must be reported on Form 8949, you must also provide the following details on each individual transaction:
- A summary of the property you sold (a)
- The date you obtained it (b)
- The date you marketed or disposed of it (c)
- The sale profits (fair market value) (d)
- The price at which you acquired the property (e)
- Profit or loss for you (h)
Fill out Form Schedule D with your 8949 totals:
After you’ve finished your 8949, add your total net gain or loss to Schedule D. Schedule D allows you to keep track of all of your overall capital gains and losses. Schedule D also contains Schedule K-1s from corporations, estates, and trusts, as well as your short & long earnings from 8949 and crypto activities.
Incorporate any Cryptocurrency Profits:
In certain circumstances, bitcoin can be acquired by mining, staking, reference incentives, or work. When you earn cryptocurrencies via these ways, you are generating income and will be subject to income tax.
Complete the Remainder of your Tax Return:
After completing 8949 and including your crypto revenue, you should have completed reporting any crypto-related purchases on your tax return. You’ll be able to file your tax form with the IRS once you’ve finished the remaining paperwork.
Ways to Reduce Crypto Taxes:
If you feel you may be supposed to pay future bitcoin taxes, here are some suggestions to help you decrease them:
Expenses for Mining Claims:
While cryptocurrency mining may appear to be a low-cost pastime on the surface, the expenses of computers, servers, electricity, and internet provider fees are substantial.
If you are a bitcoin miner, you can reduce these expenses from your mining revenue; however, the amount you can avoid is determined by whether your operation is classified as a business or a hobby.
Long-Term Cryptocurrency Investment:
If you keep a cryptocurrency asset for at least a year before trading it, your profits are taxed at the lesser long-term capital gains tax rate. Based on your taxable income for the year, this can effectively cut your tax rate in half, decreasing it from a maximum rate of 37% for short-term profits to a maximum rate of 20% for long-term gains.
Make a charity donation:
If you don’t need all of your bitcoin profits, you can lower your tax bill by donating at least some of them to charity. You will be given a tax deduction for the full amount of your bitcoin, including any profits. However, this makes sense only if you were going to donate to charity.
Losses must be balanced by profits:
As with any other investment, you may earn from bitcoin gains by deducting losses on other assets in the year you make your profit. For instance, if you earned $10,000 trading Bitcoin but lost $10,000 trading Ethereum, you would owe no taxes since you broke even.
However, these losses are not restricted to other types of cryptocurrencies. If you’re going to cash out a substantial cryptocurrency investment, look over the entire portfolio and see if there are any other losing assets you may sell to balance your profits.
Furthermore, if you lose much more than you earn in a year, you can reduce up to $3,000 in excess losses from your personal income taxes and carry forward any leftover losses to offset future investment gains.
Conclusion:
It may be taxed based on how you use cryptocurrency. Because the IRS regards cryptocurrencies to be a capital gain, any gains must be taxed. Other actions, on the other hand, may result in bitcoin taxation, and you should be prepared to declare any such transactions when you file your taxes.
