If you’re a crypto investor (or if you want to become one) you probably already know that paying tax is not the most exciting part of investing. While cryptocurrencies are overall pretty new, the IRS is working really hard to enforce crypto tax compliance. As Bitcoin and other coins keep reaching record highs, the IRS is just around the corner. It is very important to know if and how your tax liability will be affected whether you’re buying, selling or mining. This guide will explain you everything about important details about this complex subject.
Cryptocurrency is a decentralized, digital store of value and medium of exchange. Unlike your pennies, dollars, nickels and dimes it does not include any form of physical tokens of monetary value. In general, cryptocurrency are not under governmental oversight.
Do I Have To Pay Taxes?
The answer is short: yes, you have to pay taxes if you trade crypto. This is mandatory if you recognize a gain in any way. Buying crypto on its own is not a taxable event however. You can buy and hold them without having to pay, even if you notice a gain. The moment you have to pay is when you cell your cryptocurrency. Determined by the IRS, cryptocurrency should be treated as a capital asset and not as a currency.
The taxes you have to pay over your crypto depends on how long you’ve held them and you annual income. How long you’ve held them can make a great difference. For example, if you have owned your coins for less than one year, profits are short term capital gains. Which means that you will be taxed at normal income rate. If you’ve held them for a year of more it is a long-term gain, meaning that it is taxed at a lower rate (dependent on your annual income).
If you are busy mining cryptocurrency, there are some other things to consider. In this case you are responsible for taxes at your regular tax rate on the entire value of the crypto (the first day you receive it). Furthermore, it depends on how you obtained it and how you use it.
Do Transactions Get Reported?
There is no legal third party reporting crypto trades or crypto payments. In the near future this will most likely change. Up until now, the IRS has other ways to follow transactions, such as the “virtual currency compliance campaign.” This includes public outreach as well as examinations. It also has a Criminal Investigation Cyber Crimes Unit, that is able to find illegal activity in virtual currency transactions. Another way is relying on an honor system, which means that everyone should fill in their tax form truthfully.
How Do I Report It
You can fill out a form (Form 8949) in order to report everything about your crypto trades. The information that is needed are: name of the cryptocurrency, dat you acquired it, date you sold or traded it, slaes price, cost basis and your total gain or loss. This process should be repeated every year.
The rates depend, as said before your income, tax filling status and the length of holding your crypto before selling. For long term gains, it means in general that you don’t pay taxes up to $40,400. Short-term gains, however, are taxed as an ordinary income, which means that you have to pay taxes in almost every situation. Only the gains will be taxed, which means that if you bought Bitcoin for $20,000 and sold for $45,000, $25,000 will be taxed.
Paying With Crypto?
Things get complicated if you use your virtual currency to pay for goods and services. Nowadays, more and more companies choose to accept cryptocurrency as a form of payment and people begin to adopt it as an alternative currency. Be aware that you always deal with capital gains and losses in addition to whatever sales taxes you might face at the point of sale. If you, for example, want to buy groceries from the supermarket you would still have to pay long-term capital gains taxes on the difference of the worth you bought the cryptocurrency at and the worth you sold it at.
In the end it is always best to include your cryptocurrencies in your annual tax form. It is likely that in the near future the IRS will find a way to follow each transaction. You don’t want to be surprised afterwards with high tax rates that you still had to pay a few years ago.