How Do Crptocurrency Taxes Work?
Cryptocurrencies such as bitcoin and ethereum are subject to capital gains tax. The IRS now considers all cryptocurrencies capital assets; therefore, you owe taxes when you sell them for a profit. Just like when you sell traditional investments like stocks or mutual funds for a profit, cryptocurrency gains are the same.
The amount of capital gains taxes you owe depends on how long you kept your bitcoin. Short-term capital gains rates, a.k.a. your regular income tax rate, apply if you haven’t reached 12 months. If you bought your coins at least a year ago, you might be eligible for a lower long-term capital gains tax rate than most income taxes.
If you sell your crypto investment at a loss, you can claim a capital loss; this can also be used can to offset other taxes.
Taxes on Cryptocurrency Purchases
Buying or selling goods and services with bitcoin counts as a sale. That implies you owe capital gains tax if your coins have appreciated. You’ll also owe any relevant sales tax.
Crypto Taxes When Mining
Cryptocurrency earned through mining, promotions, or payments for products or services is taxable. You owe tax on the full fair market value of the coin on the day you acquired it.
If your bitcoin will appreciate over time, and you will face capital gains taxes on the profits, depending on how long you owned it
Crypto Taxes: How to File
It’s never too early to prepare for crypto taxes. Form 1040 now asks if you use virtual money during the year. If you answered yes, keep in mind the following:
Record all Transactions
Keep track of all your bitcoin transactions this should include how much you bought for it, how long you held it, and how much you sold it for.
If you transfer coins from offline cold wallets to your account, your crypto exchange may not record the cost basis or the original amount you paid for your coins.
According to Jon Feldhammer, a tax partner at Baker Botts, “software businesses have emerged that would scour the blockchain to detect movements between your wallets, whether on an exchange or not.”
Fill in the Tax Forms
Based on how you spent your crypto, you’ll need to fill out the following tax forms:
- This form documents every sale or purchase of crypto as an investment. This needs to include the total amount of coins, the purchase and sale dates, and the profit or loss for each transaction.
Schedule D. This form summarizes all capital gains and losses, including crypto.
Schedule C. If you acquired coins via mining, you must state if it was a business or a pastime. Profits from crypto mining may be subject to self-employment taxes if they exceed expenses for the year.
You would record this income on Line 8 of Schedule 1 if you were crypto mining as a hobby. You won’t owe self-employment tax, however, your cost deductions will be limited.
Filing Your Taxes
You can connect tools such as Koinly or CoinTracker to your online CPA of choice. Then file your state and federal tax returns using online tax software. TokenTax is an all-in-one accounting service that tracks and prepares both crypto and traditional taxes.
Using a Professional Service
Preparing for bitcoin taxes is difficult because the laws are always changing. If you made a lot of money from crypto, you should hire a tax expert to avoid the IRS coming after you.
Crypto Taxes in the Future
The US has four-decade-high inflation, and the IRS has responded by adjusting tax laws that affect crypto investors. Crypto tax restrictions may spread more in the following year. Tighter reporting standards for DeFi, airdrops, hard forks, and privately held wallets may be implemented. Taxpayers must report bitcoin transactions in numerous complex ways. To avoid IRS trouble, it is now critical to get professional guidance and comprehend the consequences of a single mistake step.
