If you don’t own a digital coin, you must be living in the stone age. The fact is that you could have bought Bitcoin when it was stuck at $100 and made huge profits this year, or you simply joined the crypto community when it became popular. No matter how or when you join the cryptocurrency bandwagon, you will have to pay taxes associated with your transactions, so make sure you read all the information we have for you!
The Concept Behind Cryptocurrency Taxes
The capital gains taxes are applicable to major cryptocurrencies, including Ethereum and Bitcoin. According to the Internal Revenue Service, they consider cryptocurrency to be the capital assets, and whenever they are sold at a profit, tax is applicable (yup, it’s exactly like selling your conventional investments, such as funds and stocks).
As far as the taxes are concerned, the tax amount will depend on how long you have held the crypto. For instance, the taxes will be different if you have held crypto for a year or more. To illustrate, if you bought the crypto less than 12 months ago, the profits would be taxed at a short-term rate (the income tax rate). On the other hand, if it’s been more than a year, you will need to pay a long-term capital gain tax rate, which is lower than income tax, respective to the taxable income.
Similarly, if you sell cryptocurrency in loss, you can also claim the capital loss, which can be used to offset the income taxes. However, there are various strings attached to the cryptocurrency taxes that we are mentioning below.
Taxes When You Purchase Something With Crypto
If you purchase some services or products with cryptocurrency, the purchase will be labeled the sales of crypto. Consequently, you will need to pay capital gain taxes if the coins have increased in value, and you will also need to pay the applicable sales tax.
Taxes When You Mine Digital Currency
If you have taken it up a notch and mine crypto or received it as a promotion for services and goods, it will be included as a part of taxable income. You will need to pay tax on the fair market value of the digital currency according to the day you received it. On the other hand, if you hold cryptocurrency to increase the value, you will owe capital gain taxes, depending on how long you held the crypto.
The Process Of Filing The Cryptocurrency Taxes
When it comes down to organizing the crypto-related taxes, it’s never too late. For instance, you have to use the standard form 1040 tax return as it has a clause asking if you’ve been engaged in digital currency transactions during the fiscal year. To file the cryptocurrency taxes, you have to consider the following instructions.
Record The Transactions
It is essential to track the cryptocurrency transactions, including the holding time, selling rate, purchasing rate, and receipts. For the most part, British Bitcoin Profit or crypto exchanges provide the 1099-B reporting for reporting transactions to the users and IRS, but it might not record the original purchasing rate and cost basis, especially when you transfer digital coins between the account and cold wallets. You can also connect your wallet to the crypto wallet and exchanges to track the transactions.
Fill The Tax Forms
When you have a complete record of your cryptocurrency records, you must fill the tax forms. Following forms should be filled, depending on the use of crypto;
- Schedule 1 – if you consider crypto mining a hobby
- Schedule C – if you are running a mining section for cryptocurrency and have to pay self-employment taxes
- Schedule D – it includes the loss and gains from crypto and other investments
- Form 8949 – it logs the selling and purchasing of cryptocurrency in the form of investment. It will include the total cryptocurrency owned by you, selling and purchasing date and price, and loss and gain
File Them
If you opted for online recording software, it could be connected with online tax software. From such software solutions, you can file federal or state tax returns. To summarize, these are the steps for filing your cryptocurrency taxes and making your income legal!
