Cryptocurrency Taxes 101: Prepping for the Blockchain Crypto Tax Season.
The world of cryptocurrency has grown tremendously in recent years.
Digital currencies like Bitcoin and Ethereum have emerged as alternative payment methods, and many people are investing in them similar to shares of stock.
The appeal of cryptocurrency lies in its decentralized nature, operating without the involvement of banks, financial institutions, or governments.
But with this new form of currency comes a new form of tax implications.
This crypto taxes 101 guide aims to help beginners navigate the complex world of cryptocurrency taxes.
Understanding Cryptocurrency
Cryptocurrency is a type of digital asset that can be used to buy goods and services. It’s coded with specialized computer code and recorded on a blockchain—a public, distributed digital ledger where every new entry must be reviewed and approved by all network members The most popular cryptocurrencies are Bitcoin and Ethereum, but there are thousands of different forms worldwide.
Cryptocurrency and Taxes
Every year, taxpayers throughout the United States report their earnings to the IRS. The stress associated with collecting year-end tax documents and receipts is often enough to cause anxiety. This stress is further amplified by cryptocurrency users, traders, and investors who are responsible for accounting for capital gains on virtual currency along with traditional income.
The IRS has added a crypto question on Form 1040, signaling its efforts to collect taxes on digital assets. However, its guidance has been confusing for many taxpayers, leading to worries about correctly reporting crypto income on their returns.
Preparing for Crypto Tax Season
To prepare for the crypto tax season, here are some steps to follow:
- Gather Your Transaction History: Collect all your cryptocurrency transaction history for the year. This includes purchases, sales, trades, and any earned cryptocurrency. Most exchanges will allow you to download a pdf, csv, or excel file with this information.
- Calculate Capital Gains or Losses: For each transaction, you need to calculate your capital gain or loss. This involves subtracting your cost basis (how much you paid for the crypto, including fees) from your selling price.
- Report Your Transactions: You must report all your transactions on IRS Form 8949 and summarize them on Schedule D. If you earned any cryptocurrency from mining or staking, it should be reported as income.
- Pay Any Owed Taxes: Finally, you must pay any taxes owed on your cryptocurrency gains. The tax rate will depend on how long you held the cryptocurrency and your personal income tax bracket.
Remember, it’s important to keep a detailed record of all your transactions, as the IRS may require documentation
Crypto Tax Savings Tips
Now that you’ve learned how to prepare your crypto taxes, the good news is that there are several fully legal strategies that you can use to reduce your tax burden while remaining on the IRS’s good side and minimizing your audit risk
Avoiding Frauds
In this new and rapidly developing area, many frauds try to make money on people’s gullibility and greed. It is essential to differentiate between a legitimate crypto-project and a simple con. Knowing some basic concepts and using tools that rank cryptocurrencies according to their different features can help you avoid scams.
Setting Up Your Portfolio
Setting up a cryptocurrency portfolio is not straightforward as it heavily depends on personal preferences and risk tolerance. The most popular cryptocurrency is Bitcoin, but there are thousands of different forms worldwide. It’s important to diversify your portfolio and not put all your investments into one type of cryptocurrency.
The Tools for Crypto Tax Reporting
With the complexity of crypto tax reporting, fortunately, there are new tools available to ease the process. For instance, Cointelli’s crypto tax reporting software can help simplify the task and ensure you stay compliant with the IRS guidelines. These tools can provide a step-by-step guide to filing your crypto taxes, providing clarity on often confusing and evolving IRS reporting guidelines.
Do I Have to Pay Tax at All on Cryptocurrency?
Yes. If you’re new to the world of cryptocurrency, you might be wondering how crypto tax works. Do you have to pay taxes on your cryptocurrency transactions? If so, how are they taxed? The answer is yes, you do have to pay taxes on your cryptocurrency transactions. The IRS treats cryptocurrency as property, and as such, it is subject to capital gains tax.
Further Resources for Crypto Taxes
Whether you’re a seasoned crypto investor or just starting out, resources like articles, guides, webinars, and tools can help you navigate the complex world of crypto taxes. ZenLedger, for instance, provides a comprehensive cryptocurrency tax calculator and offers professional tax prepared plans for both crypto and non-crypto taxes.
Hiring a Professional for Crypto Taxes
When dealing with substantial income from cryptocurrency, it may be worth hiring a certified public accountant (CPA) who specializes in this type of tax work. This can save you from potential complications and prevent issues with the IRS in the future
Taxable Events in Cryptocurrency
It’s important to understand all taxable events where traders and hodlers are usually liable to pay taxes on their crypto. This includes not only selling and trading but also mining and receiving payments in cryptocurrencies.
Sharing Knowledge on Crypto Taxes
As the world of cryptocurrency continues to evolve, so too does the need for clear and accessible information. Sharing resources, such as crypto and bitcoin tax guides, can help others navigate this complex landscape. Consider sharing resources via email, social media, or other platforms to help spread awareness and understanding.
In conclusion, while cryptocurrency taxes can be complex and constantly evolving, a range of resources and professional assistance are available to help navigate this process. Always remember to stay informed and consult with a tax professional if you’re unsure about your tax obligations.
Final Thoughts
Cryptocurrency is a rapidly evolving field, and staying updated is crucial. Following leading cryptocurrency blogs like Coinbound, CryptoPotato, Bitcoinist, and Crypto News can help you stay informed about the latest trends and changes in the cryptocurrency and blockchain industry.
Remember, understanding and managing your cryptocurrency taxes can be complex, but it’s an essential part of being a responsible cryptocurrency user. If you’re unsure about anything, it’s always best to consult with a tax professional experienced in cryptocurrency.
