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Do you wanna know how you owe taxes on Cryptocurrency? Read Here!!!

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cryptocurrency taxation

Taxation of Cryptocurrency:

Taxation of Cryptocurrency is complicated and requires meticulous recordkeeping when purchasing, selling or exchanging it. An owner of a cryptocurrency has a responsibility to report this appropriately. The world has seen the creation of numerous cryptocurrency tax-tracking applications in order to help cryptocurrency investors, users and traders properly file their taxes. Cointracker.io and CryptoTrader.tax are lading providers to investigate. For tax purposes, there are more than ten companies that provide an application to track your crypto.

Gains and losses from cryptocurrency trading are reported on IRS form 8949. Personal tax returns 1040 and 8949 are submitted together. The IRS receives crypto transactions and trading reports from the major crypto providers in the U.S. These include Coinbase, Gemini, Kraken, PayPal, Cash App, and Binance.com. In any case, you must report to the IRS regardless of whether the exchange reports to IRS.

A deeper understanding of how cryptocurrency was taxed:

Bitcoin taxation was established by an IRS ruling issued in 2014 that determined Bitcoin should be treated as a capital asset (like stocks and bonds), rather than a currency (like dollars and euros). Crypto owners will have to deal with more complicated taxes as a result of this decision.

Profits on the sale of capital assets are taxed. A capital gains tax is imposed on purchases made with cryptocurrency that has appreciated in value over the amount paid for them.

 For example, let’s say you purchased $20 worth of Bitcoins and you held them as their value increased from $20 to $200. You’d owe capital gains taxes on the $180 profit you’d realized if you spent the Bitcoin to purchase $200 worth of groceries — even if it seems as if you spent it instead of selling it. For the IRS as well, this is true.

Jeff Hoopes, an associate professor at the University of North Carolina and research director of the UNC Tax Center, says the IRS decided to tax crypto as a capital asset because that is how most people treat it. “I am assuming [the IRS] decided this because most people hold crypto as an investment, and we tax the appreciation on investments,” he says.

Jon Feldhammer, the tax partner at Baker Botts, believes that the IRS’s move may have been a pragmatic one, too. It became clear to the IRS that it was missing out on a substantial tax revenue source when [cryptocurrencies] began trading in the tens of millions each day, he explains.

cryptocurrency taxation

You owe cryptocurrency taxes if:

If you mine cryptocurrency:

 In crypto “mining”, you use your computer to solve complicated equations and record data on the blockchain. Upon completion of this work, new crypto tokens may be issued in exchange for your services. The mining of cryptocurrency will result in a tax bill on the entire amount.

If you get crypto as a reward or an airdrop

 The cryptocurrency you receive through marketing campaigns or airdrops counts as taxable income.

If you receive payment for goods or services in cryptocurrency:

 A crypto payment can be taxable income just like a cash payment if it is made for goods or services rendered. If, however, the customer receives more value from their crypto than they paid for it, they may owe income taxes as well.

If you sell cryptocurrency to realize an investment gain:

 When you sell cryptocurrency for a higher price than you paid for it, you will owe taxes on the difference.

If you convert or exchange one crypto for another:

 Whenever you exchange crypto or convert crypto—for example, swapping bitcoin for ethereum—you owe taxes on any gains you make. You would owe taxes on $600 in realized profits, even if you just bought bitcoin for $400, then spent it on ethereum for $1,000.

 Capital Gains: Long-Term and Short-term

Many cryptos and NFT traders are accustomed to frequent transactions, which is another factor to be aware of. The constant “buy the dip” phenomenon of investors has spawned a slew of traders who sell at high prices then buy again at low prices.

Odyssey Group Wealth Advisors’ president, Aaron Sherman, says start-up investors may not be aware of the tax implications of short-term crypto holdings. He says long-term capital gains are taxed at rates that are lower than ordinary income tax rates if the asset was held for at least one full year. If the asset is held for less than a year, the short-term capital gain is subject to ordinary income tax. 

Investors are encouraged to hold assets for longer periods thanks to the difference between short and long-term tax treatment, says Sherman. Day traders who trade cryptocurrency assets might have to pay a large amount of taxes because of this difference.

In the meantime, Feldhammer points out that NFTs may be considered a “collectible,” in which case they would be subject to a top tax rate of 28%, rather than 20%.

What are some special considerations for cryptocurrency taxes?

In terms of taxation and reporting, Bitcoin is not as straightforward as it sounds. A major challenge for bitcoin price determination on sale or purchase transactions is the volatility of bitcoin’s price. Taxation of cryptocurrency also involves identifying the appropriate accounting method.

 Tax strategies such as Last In, First Out (LIFO), and Highest In, First Out (HIFO) have the potential to lower taxes, however, the IRS has approved very few instances where these strategies were applied to crypto traders. Cryptocurrency accounting is usually done using the First In, First Out principle.   

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