Cryptocurrency taxes, in their current state in the US, aren’t exactly a walk in the park. Currently, the Internal Revenue Service’s (IRS) stance on some crypto-related things isn’t clear, and the taxpayer has to compile all the information himself or herself.
This, according to Entrepreneur, means going through every single trade they’ve made, record the necessary data, and determine whether they’ve made a profit or not. Currently, tools like Bittaxer help taxpayers deal with the burden, but there are some things it’s important to know.
1.Cryptocurrency Trades And Sales Are Taxable
The US’ IRS wants cryptocurrency traders to report all of their individual trades and sales of cryptocurrency. Per Entrepreneur, specifically those in which cryptocurrencies are converted to USD, spent, or sold for another cryptocurrency. This means cryptocurrency traders on exchanges should be included.
2.Not Paying Crypto-Related Taxes Can Lead to Huge Fines
Various cryptocurrency traders may not be willing to pay taxes over the amount of work they need to put in alone, or over the semi-anonymous nature of the cryptocurrency space. Currently, not paying them is considered tax fraud and can lead to a maximum prison sentence of five years, or a $250,000 fine.
The IRS going after cryptocurrency traders isn’t unprecedented. In a court case dating back to 2017, it got Coinbase to release information on investors who traded over $20,000 on its platform between 2013 and 2015.
3.There Are Two Types Of Cryptocurrency Taxes
Entrepreneur cites the IRS’ Guidance on Virtual Currencies to note that cryptocurrency is currently considered property in the US. This means taxpayers have to pay capital gains taxes on them.
In the US, capital gains taxes can be long-term or short-term. Long-term applies to cryptocurrencies that were held for over a year before being sold, while short-term applies to cryptos sold after being held for less than a year. The report notes long-term capital gains tax is “typically lower.”
Cryptocurrencies can also be subject to income tax, as employees who get paid in crypto have to declare their earnings as well. These are subject to the IRS’ seven tax brackets.
4.Miners Aren’t Exempt
So far we’ve seen cryptocurrency traders and investors have to pay taxes on cryptocurrency gains. Notably, miners aren’t exempt as well, as cryptos earning by securing networks are subject to income taxes, qualified as self-employment.
While not everything cryptocurrency-related is taxable, these are the mains crypto tax categories to pay attention to. Those who lose money on cryptocurrency traders can claim a loss to save on capital gains taxes as well.
5.There are Tools Out There To Help
Tracking every single trade one has made over the course of a year can seem daunting, and if cryptocurrency traders or investors also mine than dealing with cryptocurrency taxes may be a huge burden.
To help there are tools out there, with some even being provided by cryptocurrency exchanges like Coinbase and Bitfinex to help its users. Another tool to consider is Bittaxer, which supports most major cryptocurrency exchanges, and is designed for both individuals and CPAs.
Per its website, BitTaxer automatically keeps its users compliant with the IRS’ guidelines around cryptocurrency taxation. To use it, users have to add transaction data from their own records or upload records from their exchanges, and classify transactions that aren’t buys and sells.
Then, Bittaxer takes care of everything, calculating gains and losses and attaching the proper forms that are to be attached to the tax return.