Filling Crypto Taxes - What Do You Need to Know?
Cryptocurrencies have become a hot topic in the financial world over the past decade.
07:01 23 February 2023
Cryptocurrencies have become a hot topic in the financial world over the past decade. As their popularity continues to grow, so does the scrutiny from government agencies and regulatory bodies. One of the most important things that crypto investors need to know is how to properly report their cryptocurrency transactions for tax purposes. In this article, we will provide an overview of what you need to know when it comes to filling crypto taxes.
What is cryptocurrency?
Before diving into the tax implications of cryptocurrency, let's define what it is. Cryptocurrency is a digital or virtual currency that uses encryption techniques to secure and verify transactions and control the creation of new units. It operates independently of a central bank and can be used for online purchases, investments, and other financial transactions.
Taxation of Cryptocurrency
The Internal Revenue Service (IRS) treats cryptocurrency as property for tax purposes, which means that the tax rules that apply to property transactions also apply to transactions involving cryptocurrency.
To this end, all gains or losses arising from the sales or exchange of cryptocurrency are expected to be reported on your tax return.
When do you need to report cryptocurrency on your taxes?
One important question crypto investors are often faced with whenever they choose to invest in crypto is when to report their crypto investments for proper taxations. According to the stipulated laws for crypto taxation across different regions, crypto traders are required to report any cryptocurrency transactions on their tax return if they:
- Sold cryptocurrency for fiat currency (For instance when you buy DOGE or any other popular cryptocurrency and sell them back to the fiat currency USD).
- Traded one cryptocurrency for another
- Used cryptocurrency to purchase goods or services
- Received cryptocurrency as payment for goods or services
- Mined cryptocurrency
How are cryptocurrency gains and losses taxed?
The tax treatment of cryptocurrency gains and losses depends on how long you held the cryptocurrency before disposing of it. If you held the cryptocurrency for one year or less, any gains or losses are considered short-term capital gains or losses. If you held the cryptocurrency for more than one year, any gains or losses are considered long-term capital gains or losses.
Short-term capital gains are taxed at the same rate as your ordinary income tax rate. Long-term capital gains are taxed at a lower rate, with the maximum tax rate being 20% for high-income taxpayers.
Additionally, if you have a net capital loss, you can use up to $3,000 of that loss to offset other income.
How do you report cryptocurrency on your taxes?
To report your cryptocurrency transactions, you will need to use Form 8949 and Schedule D of your tax return. You will need to list each transaction separately, including the date of acquisition, the date of sale, the purchase price, the sales price, and the gain or loss.
Additionally, if you received cryptocurrency as payment for goods or services, you will need to report the fair market value of the cryptocurrency as income on your tax return. The fair market value is determined by the exchange rate at the time of the transaction.
Cryptocurrency taxation can be complex and confusing, but it's important to make sure you are reporting your transactions correctly to avoid any penalties or legal issues. If you are unsure about how to report your cryptocurrency transactions on your tax return, it may be best to seek the advice of a qualified tax professional. Additionally, it's important to keep accurate records of your cryptocurrency transactions to make tax time easier and more accurate.