Cryptocurrency is more mainstream than ever, and that’s bad for tax returns. Income generated from crypto is taxed differently than income.
It’s tax season and the emergence of digital items and crypto bought and sold on the internet made declarations more complicated than usual. Cryptocurrencies are more common than ever, and the average person probably doesn’t know that they should report their transactions to the Internal Revenue Service, let alone how to report them. Every individual situation is different, so meeting with a professional accountant is the only way to ensure that cryptocurrencies are classified correctly. This guide is not advice; however, it could provide the basic information needed to be better informed about the current situation and requirements.
First, it is important to recognize that cryptocurrencies are not legal tender in the United States. Since cryptocurrencies are not considered real money in the US tax system, they are reported differently than standard income. When a US citizen files their income taxes, they pay a percentage of their income in USD based on their income bracket. With cryptocurrency, however, the tax system sees the new currency more like a stock or a car than legal tender. It is an asset, which can appreciate or depreciate, and these factors contribute to determine whether the cryptocurrency is taxed or not and the tax rate.
The easiest way to tax crypto is when it is sold. When cryptocurrency is sold in the United States, it is taxable at its fair market value. This means that if on the day the cryptocurrency is sold it is worth a specific amount in USD, that value is taxable income. Theirs provides two forms that are primarily used for cryptocurrency taxation: Form 8949 and Form 1010 (Appendix D). These two forms are used to report capital gains and losses, which is exactly what selling cryptocurrency is considered under US tax law. To complete these forms, consult a professional and use transaction logs found in cryptocurrency market applications, such as Coinbase.
Other taxable crypto transactions
Now that many businesses and online retailers are considering cryptocurrency as a form of payment, another taxable event is possible. When someone pays for a good or service with cryptocurrency, it is taxable, but not in the way that person might expect. Instead of simply paying sales tax, as is customary in legal courts, it must once again be calculated whether the sale is at a loss or a gain. The cryptocurrency is given in exchange for a good or service at a defined market value, and if that market value is greater than that for which the part of the cryptocurrency was purchased, another capital gain must be declared. Although it may seem trivial, the IRS can and will take action against people in the United States who misrepresent their cryptocurrency gains and losses.
Some cryptocurrency transactions are not taxable, such as simply holding cryptocurrency in a wallet. When cryptocurrencies are held, no gain or loss is realized. Thus, taxes are not paid on these currencies until they are sold. Likewise, moving cryptocurrency between wallets or accounts is also not taxable. The truth is that each type of individual cryptocurrency transaction is treated differently under US tax law, and cryptocurrency holders should consult with a professional accountant before filing their taxes. However, having an understanding of how cryptocurrency is perceived by the IRS – as capital – should ensure that tax season goes as smoothly as possible.
Next: New Bill May Allow US Government to Covertly Ban Crypto Transactions
NYT crossword answer pokes fun at Star Wars vs. Trek
About the Author