Cryptocurrency is a digital benefit designed to work as a medium of exchange that uses clear-cut cryptography to lock financial transactions, control the creation of additional entities, and verify the transfer of assets. How does cryptocurrency work? It is the transaction sent between equals using software called cryptocurrency wallets. The person generating the operation uses the wallet software to transfer balances from one account (a public address) to another.
Any profits on cryptocurrency financing and exchange need to be reported as capital gains or losses to the government. When it comes to taxes, cryptocurrency should be treated like property (a capital asset like stocks, bonds, and other investment properties). For tax purposes, crypto is handled like real estate and not treated as currency. Therefore it is subject to short- and long-term capital gains tax, whether for purchasing goods or services or for trading or investment.
Sadly, cryptocurrency taxes seem so multifaceted not a lot of people file them, but as cryptocurrency becomes more and more popular revenue services are focusing extra attention on digital assets, it’s essential to pay cryptocurrency taxes. Reporting cryptocurrency taxes is different from paying another capital gains or income tax because it is up to you to compile your information yourself.
Here are some basics tips on how to handle cryptocurrency this tax season.
1. Trading cryptocurrency for goods or services – For example, if you are trading cryptocurrency for a video game, a record needs to be kept of the transaction which states the market value of the video game at the time of purchase.
2. Trading cryptocurrency as a capital asset – A record needs to be kept of transactions, such as trading bitcoin to U.S. dollars. This deal needs to be accounted for and reported at tax time. All capital gains and losses (and transactions) are entitled to be taxed.
3. Stating the bottom line on cryptocurrency and taxes – A total of your profits and losses from selling, using and trading cryptocurrency needs to be recorded, as well as your trades, transactions, and holdings and account the information on your taxes, and pay your capital gains tax should there be any.
There are two main categories of cryptocurrency capital gain taxes long-term and short-term. Long-term means you held currency for a year or more before selling or trading, while short refers to cryptocurrencies you have retained for less than a year. Tax rates depend on the state and your current tax bracket.
Not everything is taxed in cryptocurrency. Stakeholders are not taxed for buying and holding on to their crypto. It’s when you sell or trade any cryptocurrency that it becomes subjected to taxes. If you take a loss on your cryptocurrency trades or sales, you can claim a loss on your capital gains tax.
Specific information needs to be gathered for tax purposes:
- Make a list of all cryptocurrency trades for the taxable year, including trade dates, how much it was funded for, how much it was sold for, the cost of doing trade, the net gain or loss. The total amounts need to be calculated in U.S. dollars centered on the exchange rate at the time of the deal.
- Cryptocurrency is regarded as an investment property and subject to either short or long-term capital gains taxes, plus the standard rules for investment properties.
- Capital gains are calculated towards your taxable income and will influence your tax bracket.
- Capital losses and gain in the tax year can be written off against each other.
Cryptocurrency interactions have different criteria for the types of records you keep and how long you keep them. You are responsible for keeping all your required data and secondary documents for at least six years. The following are records that should be provided for your dealings:
- Date of transactions
- Receipts of purchase or transfer of crypto
- Value of cryptocurrency in U.S. dollars at the time of sale
- Digital wallet records and cryptocurrency addresses
- Description of trade and the other trading party
- Exchange records
- Accounting and legal costs
- Software costs connected to managing your taxes
Understand how the tax system works in the U.S. If you frequently trade cryptocurrency, you will probably owe a more significant amount. On the other hand, those with low incomes and small long-term gains can owe no capital gains tax.
It is essential always to assume that revenue services know your trading history and the government will want its due on your capital gains through cryptocurrency taxes.