The rise of cryptocurrency has many people wondering how it can and will affect their tax filing. Let’s go through some of the ways crypto investments could show up next year on your tax forms.
Virtual Currency and Cryptocurrency
Since 2014, the IRS has treated virtual currency as property, for Federal income tax purposes. According to the IRS Notice 2014-21, virtual currency “is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” Virtual currency can be used to pay for goods or services, or it can be held for investment purposes.
Similarly, cryptocurrency is a type of virtual currency that “uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.”
Right now, Bitcoin and Ethereum are some of the most popular cryptocurrencies, but there are thousands of different ones moving through markets across the globe. Cryptocurrency’s boon in popularity can be attributed in part to its safety – each transaction is specially encrypted and recorded on a digital ledger (blockchain) that is reviewed and approved by every member in the network.
Basic Cryptocurrency Tax Liability
As for your cryptocurrency tax liability, the classification of crypto as property means you may have to pay taxes on your holdings. And because of the rise in popularity in cryptocurrency transactions, the IRS will be looking to enforce the reporting of these assets more and more in the coming years.
IT’S also important to remember that the different transactions you enter into with cryptocurrency – buying selling, swapping, mining, and more – may be treated differently by the IRS and on your tax returns. Let’s take a look at some of the ways cryptocurrency tax liability is handled by the IRS.
Crypto Transactions and Their Tax Implications: Buying, Selling, & Swapping
Every trader’s cryptocurrency tax situation is a bit different, but most of these transactions are handled similarly to how stock trading is.
If you bought cryptocurrency (or are planning to buy cryptocurrency) with cash, you typically don’t have to report anything on your taxes until you sell or trade it.
Typically, if you buy and then sell or trade cryptocurrency, you’ll have to report capital gains and losses for those transactions. The amount you’ll be responsible for owing the IRS is based on whether the gains were short- or long-term.
If you owned the cryptocurrency for 1 year or less and you sold it, you will be responsible for paying short-term capital gains, which can be upwards of 37% of what you made on the sale.
For long-term gains, where you held the cryptocurrency for more than 1 year, you’ll owe slightly less. You can read more about long-term and short-term capital gains tax rates here. Capital gains and losses are reported on tax Form 8949.
Active traders who received payments for cryptocurrency transactions that exceeded $20,000 and performed more than 200 transactions will also have to report their earnings on a 1099-K. For all your 1099 and 1098 e-filing needs, you can reach out to our experts at eFile360 today.
Swapping one cryptocurrency for another is also a taxable transaction. If you bought one type of cryptocurrency and then sold it at a profit to buy a different type of crypto, you would owe capital gains on that transaction. The reverse is true as well – if you lose money swapping crypto, you must report it as a capital loss.
Crypto Transactions & Their Tax Implications: Mining & Paying for Goods or Services
Conversely, if you mined crypto or were paid in crypto for providing someone with other goods or services, this is classified as “Other Income” and goes on your Schedule 1.
You’ll also have to report it on your taxes if you are the one who paid for a good or service with cryptocurrency. From buying a fast-food meal to paying for monthly rent or utilities, you’ll need to report these transactions in much the same way you report selling stocks.
Cryptocurrency Can Make Taxes More Difficult – eFile360 Helps Make Forms Filing a Breeze
Keeping your forms and filing organized in preparation for the big tax season push is a pain – and every year it gets more difficult to remember which transactions go where, what items are tax-deductible, and so much more.
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