Have you ever purchased, sold, used, or traded cryptocurrencies? If this is the case, you may owe taxes. If you're a taxpayer in the United States of America. Bitcoin, Ethereum, Dogecoin, and other cryptocurrencies are gaining popularity as a kind of alternative investment or currency.
If you own or trade cryptocurrencies, you'll eventually have to figure out how to pay taxes on them. Later in this post, I'll answer your questions.
What are Crypto Currencies?
If you don't already know, cryptocurrencies are a type of digital or virtual currency that was first introduced as Bitcoin in 2009. Cryptocurrencies provide cheaper transaction costs, transaction secrecy, and are managed outside of government control in the United States.
The Internal Revenue Service (IRS) has published virtual currency instructions. It was long assumed that your crypto transactions would never be discovered by the IRS. The transactions are designed to be private and untraceable by the authorities. Despite the fact that there is a lot of confusing information out there, you must declare your gains and losses on each transaction or when you obtain cryptocurrency.
Also Read: Top 5 Best Cryptocurrencies to Invest in 2022
Is it necessary to declare your cryptocurrency holdings on your tax return?
Whether you receive a tax form from a crypto exchange, the IRS holds you, the taxpayer, accountable for reporting all income and transactions. Furthermore, the IRS now expects you to respond yes or no to a question concerning whether you had any cryptocurrency transactions during the year.
It turns out that the IRS is looking into unreported cryptocurrency transactions. They've already subpoenaed Coinbase's documents and issued thousands of Email and text deficiency notifications.
As a result, if you use Robin Hood, you will now receive a 1099 B proceeds from broker and barter exchange transactions statement, which summarises your crypto and Bitcoin transactions. This is perfect since all of the information, including your purchase price and sale revenues, is provided to you in a clear and concise manner.
At the moment, Coinbase does not provide this service. Keep in mind that crypto Texas is sophisticated and spans a wide range of transactions
Examples of cryptocurrency transactions that are taxable.
Here are a few Examples: Selling crypto for cash, using crypto to pay for products and services, receiving payments in crypto, exchanging crypto for crypto, receiving crypto rewards, and mining for crypto are all options.
All of these transactions are taxable and must be reported at their fair market value. So, if you used Bitcoin to buy a Rolex watch, you would have a disposition or sale of Bitcoin equal to the watch's cost, or its fair market value in dollars.
If you got Dogecoin as payment for services done, that amount is compensation and taxable income to you; cryptos received in Forks are also taxable transactions.
Don't expect a detailed tax report identifying your taxable transactions if you're a crypto dealer. Keeping proper financial records is challenging, but necessary. You, the taxpayers, bear the burden of proof. Donating cryptocurrency to a tax-exempt charity, buying and holding, or huddling as they call it, and transferring cryptocurrency between wallets are all examples of non-taxable crypto transactions.
Now that you know what constitutes a taxable transaction, you must determine whether you made a profit or a loss on each one. This implies you'll have to go over each transaction and figure out the cost basis to see if there was a taxable gain or loss.
In a given text, losses can be utilized to offset capital gains. There's a $3000 restriction on how much you can spend. Cryptocurrencies and taxes are complicated topics. If you have specific questions, I strongly advise you to seek advice from a certified tax practitioner.
Also Read: The Crypto Loophole That Saves You a Lot of Money: Crypto Wash Sale Rule
Get your tax forms ready.
The next step is to complete your tax forms. Form 89 49, Sales and Dispositions of Capital Assets, may be required. The transactions described here are either a capital gain or a capital loss. These totals are then added together to produce 1040. For 1099 MISC, Schedule D provides a summary of your capital gains and losses.
If an individual has earned $600 or more in a tax year, Miscellaneous Revenue may be required to declare rewards or fee income from staking and various other earnings. Even if you work with a tax professional, completing these papers might be difficult.
Cryptocurrencies and taxes are a tricky problem. Don't expect the IRS to remain in the dark. They may be behind the times in terms of technology, but they are paying attention. Failure to comply with tax rules, information reporting penalties, tax evasion, and even tax fraud can all result in fines.
Finally, keep in mind that almost every Bitcoin or cryptocurrency transaction could be subject to taxation. I hope you found the information in this post useful.
Disclaimer: This article and the concepts it contains are intended solely for amusement and informational purposes and should not be taken as accounting, tax, or legal advice. It is your obligation to independently verify and confirm the accuracy of any information you choose to rely on or act on based on this post.