Tax season is rapidly approaching. If you’ve been buying and selling cryptocurrencies in the last year, you might be wondering if you need to report and pay taxes on virtual currency. The length of time you’ve owned the cryptocurrency will be considered.
Cryptocurrency remained in the spotlight in 2021, as Bitcoin continued to perform well, with its price doubling by the end of the year. As a result, cryptocurrency has become a more important part of financial portfolios for investors, consumers, and large corporations. This also implies that there are now guidelines for reporting and paying taxes on cryptocurrency.
Because digital currency isn’t well regulated, it’s a good idea to learn about the tax implications of buying, selling, and using it before you get started. Even if you or your company has been dealing with cryptocurrency for a while, it is a good idea to refresh your memory on what needs to be reported. This article will attempt to answer your cryptocurrency tax questions.
How Is Cryptocurrency Taxed and Reported?
The IRS considers all types of cryptocurrencies to be virtual currencies. This includes Bitcoin, Dogecoin, Ethereum, and other currencies that may have slipped under the radar.
You must report your gains if you exchanged, sold, or used cryptocurrency to purchase goods and services. The new IRS form 1040 (federal annual tax return)—the same form you fill out when you file your taxes for free online—now includes a section in which you are asked if you have received, sold, sent, exchanged, or otherwise acquired virtual currency.
If you bought any type of virtual currency with real money, whether for yourself or for your business, you would say “no” to this question. However, if you obtained virtual currency through mining, you must answer “yes” because the value is immediately taxable.
Certain gains must also be reported on Form 8949. For example, if you bought $1,000 in Bitcoins and later sold them for $1,500, you have $500 in gains, which you must pay taxes on. However, if you sold those Bitcoins for $500 and made a $500 loss, you can deduct that loss to offset capital gains.
How to Calculate Taxes for Cryptocurrency?
You must first know the value of the virtual currency in US dollars in order to determine how much should be reported in gains or losses and how much tax you must pay. This amount, including any fees paid, is referred to as the cost basis. To calculate your tax liability, compare this to the price of the currency when you sell or spend it.
However, this is not the only step. You should also consider how long you’ve owned the asset. The type of capital gain or loss will be determined by this. Your gains and losses will be classified as short-term’ or ‘long-term,’ depending on how long you’ve held your cryptocurrency. Here’s how to tell them apart:
Short-term capital gains and losses refer to assets owned for less than a year. This crypto tax rate is comparable to standard income rates, ranging from 10% to 37%, and is comparable to ordinary income such as salaries, commissions, or side business.
Long-term capital gains or losses apply to assets held for more than a year before selling. These are taxed at a lower rate ranging from 0% to 20% depending on your income.
We talked about deducting losses to offset capital gains earlier. This offset can only be applied to losses and gains of the same type. Short-term losses, for example, will first reduce your short-term gains. Any remaining net losses can be applied to another capital gain.
If you still have capital losses, you can use them to offset up to $3,000 of regular income. After that, any remaining capital loss will be carried forward to the following year.
What Happens If You Don’t Report Your Cryptocurrency Transactions?
Many people are unaware that they may be subject to crypto taxes. This is because you may not receive the basic forms that explicitly state how much tax is paid and owed.
While some cryptocurrency exchanges will generate reports to assist you with your tax filing, this service is not always available. It is your responsibility to keep track of all your transactions and accurately report your cryptocurrency gains and losses.
Failure to report cryptocurrency transactions, like regular transactions, can result in penalties, interest, and IRS audits. Even if you were unaware of the requirements, the IRS will not consider any failure to report or pay taxes to be an honest mistake.
While cryptocurrency is secure in many other ways, it is not anonymous or untraceable. The IRS Fraud Enforcement Office collaborates with private organizations to identify individuals attempting to fraudulently avoid reporting crypto gains.
Crypto Tax Calculators and Software
Reporting and calculating how much cryptocurrency taxes you owe can be difficult and perplexing. Keep track of all your transactions and record them for safekeeping to ensure you stay on the right side of the law. While you can hire a third-party vendor or custodian to assist you, there are also online crypto trackers and calculators available.
There are numerous cryptocurrency tax software and cryptocurrency portfolio trackers to choose from. These trackers enable you to connect multiple exchanges and virtual wallets in order to keep track of the total amount and value of your cryptocurrency. Some of the best cryptocurrency tax software and calculators are:
- Pionex is a trading platform that is available 24 hours a day, 7 days a week, and includes 16 free trading bots.
- Users can use Blockfolio to buy, sell, and track their investments across multiple exchanges.
- Coinstats offers real-time price updates and is compatible with the most popular cryptocurrency platforms, including Coinbase and Binance.
- Delta is an investment tracker that allows you to keep track of your cryptocurrency as well as other investments such as stocks and mutual funds.
- TurboTax is an online tax preparation software that can support over 2,000 cryptocurrencies at the same time.
- Tax Act is a different online tax preparer that allows for crypto tax reporting and calculations.
The Big Picture….
Yes, any virtual currency you buy, sell, trade or mine must be taxed. If you use cryptocurrency to pay for taxable items, you will also be taxed. Wages, commissions, and income from side businesses are all taxable and must be reported.
Keep in mind that all cryptocurrency transactions must be converted to US dollars before being reported. Keep careful track of your crypto transactions and record them immediately for safekeeping to avoid making an unintentional mistake on your crypto taxes.