The value of Bitcoin, Ethereum, and other cryptocurrencies is rising, and their popularity is increasing. Many Americans now see cryptocurrencies as a promising investment since it allows them to purchase and sell at any time of day and see their money grow over the course of a year.
Since for many keeping tracks of cryptocurrency taxes becomes difficult, new technology has been developed to help you with successfully tracking your taxes. For example, CoinTracker is one of the best examples of a tool that will help you track your entire crypto portfolio and access tax reports all from one place.
Although using their help is highly advantageous, it’s also pretty useful to know how crypto taxes work. This is why we’ve compiled this guide to help you stay informed.
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Is Cryptocurrency Income Taxable?
In brief, yes, the Internal Revenue Service classifies cryptocurrencies as property. According to IRS Publication 544, Sales and Other Dispositions of Assets, cryptocurrency transactions are treated as “Property” for tax purposes. Your crypto holdings must be reported on your tax return if a taxable event occurs.
How Is The Crypto Tax Calculated?
The Internal Revenue Service treats cryptocurrencies as property. As a result, two types of taxation may be levied on them: income tax and capital gains tax.
The nature of your crypto-related transactions will largely dictate how much tax you’ll owe.
- Taxes on Earnings. If you have any crypto income, you must report and pay taxes on that income.
- Capital Gains Tax. If you are trading, selling, or spending your cryptocurrency, you must pay capital gains tax.
Taxation On Cryptocurrency Gains
Depending on what you’ve acquired, you could have to pay taxes on your capital gains. These may be broken down into two distinct types: gains from short-term investments and long-term capital gains.
These are proportional to the asset’s duration of ownership (cryptocurrency).
When an investor sells crypto for more than they paid and keeps the investment for less than a year, the profit is considered a short-term capital gain. These are treated the same as wage income and subject to taxation at the individual’s standard rate.
When an investor sells cryptocurrency for more than they paid for it and kept holding it for more than a year, they have made a long-term financial gain. Long-term capital gains are subject to the more lenient long-term capital gains tax rates, which may be as low as 0%.
To determine your profit or loss, you simply need to calculate the difference between the crypto’s cost basis and the fair market value at the time of the transaction.
Cryptocurrency Taxes On Capital Gains
The federal tax rate on cryptocurrency is the same as the percent on capital gains. In 2022, the rates are as follows: 10%-37% for short-term gains and 0%-20% for long-term gains.
The IRS uses your revenue and the amount of time you held the cryptocurrency to determine your gain or loss. The holding period for a cryptocurrency starts the day after purchase and ends when the cryptocurrency is sold, deposited, or otherwise disposed of.
How Can I Determine My Crypto Tax Liability?
It takes a lot of effort and time to figure out your crypto tax liability. You may spend hours on this task if you do it by hand, or you can use a crypto tax calculator to speed things up.
Here are the procedures to take if you want to do your own crypto tax calculations:
- Calculate the total value of your taxable crypto transactions over the reporting period.
- It’s important to know which deals are taxable for income purposes and which ones are for capital gains.
- Figure out what you’ve made and lost in capital gains, as well as any other income and costs, since then.
- Afterward, you must disclose to the IRS any cryptocurrency income as well as any taxable cryptocurrency sales, proceeds from sales, and capital gain or loss.
- You must use Form 1040, Schedule D, and Form 8949 to declare your cryptocurrency sales, capital gains, and losses when filing your yearly tax return. In addition, your crypto earnings must be reported on either Schedule 1 or Schedule C on Form 1040.
Crypto tax is just as difficult as regular taxation. The Internal Revenue Service (IRS) updates and alters its cryptocurrency tax rules in tandem with industry developments. Falsifying tax returns by concealing or failing to record crypto profits, losses, and income is a criminal offense in the eyes of the Internal Revenue Service.
Criminal prosecution and up to five years in jail are possible consequences. The IRS has acknowledged issuing warning letters to cryptocurrency investors whom they suspect of tax evasion or underreporting. It is your responsibility to declare any cryptocurrencies you have acquired via earnings, transactions, or sales on your tax return.