Assistance with Bitcoin Taxes
Taxes and Bitcoin
Like any disruptive technology, cryptocurrency legislation is always developing. But one thing has remained constant since at least 2014: bitcoin revenues are subject to federal income taxation. The Internal Revenue Service (IRS) published IRS Notice 2014-21.1, which outlines the fundamentals of bitcoin taxation in the United States.
This notification recognized virtual currencies for tax purposes as property, rather than foreign currency, as described in the previous notice. Further:
- The value of a currency when it is utilized in a transaction is set at the fair market value in U.S. dollars that it has at the time of the transaction. The difference between the value of the asset when it was acquired and the value of the asset when it was spent is taxed at the capital gains rate.
- If the asset is sold or exchanged for a profit, the profit is subject to taxation at the capital gains rate.
- If you sell cryptocurrency at a profit, you owe capital gains on that profit, just as you would on a share of stock.
- You use cryptocurrency to buy goods or services, you owe taxes on the increased value between the price you paid for the crypto-coin and its value at the time you spent it.’
- If you accept cryptocurrency as payment for goods or services, you must report it as business income.
- If you are a cryptocurrency miner, your income gained from mining counts as business income.
- For U.S. tax purposes, a Bitcoin or Ether, or any other cryptocurrency, is valued at its equivalent in U.S. dollars at the time of the transaction.
Understanding Cryptocurrency and Taxes
Back in 2019, the Internal Revenue Service (IRS) delivered 10,000 “educational letters” to taxpayers it thought owed the government tax payments for virtual currency transactions.
Clearly, the days of anonymous bitcoin transactions were at an end. It is probable that the government agency based its list of recipients on customer data gathered from bitcoin exchange Coinbase. 2
Those who do not report income accurately might suffer fines, interest, or even criminal prosecution, the IRS said.
How Much Crypto Tax Do You Pay in the Us?
The amount of bitcoin tax you owe in the United States is calculated depending on how long you’ve owned the assets before selling them, as well as whatever income tax category you’re in.
This is broken down into two sections:
Capital Gains on Short-Term Investments:
Profits from a crypto asset held for less than a year are taxed at the same rate as income from any other source. Regardless of whatever tax category, you fall into. Any losses can be used to income tax deductions up to a limit of $3,000 in value. Any additional losses will be able to be carried forward.
In the case of crypto assets held for more than a year, the capital gains tax is significantly lower; the rate is 0 percent, 15%, or 20% based on individual or combined marital income.
Is There a Per-transaction Tax on Cryptocurrency?
Although there is no transaction tax on cryptocurrency trading, there are expenses associated with it.
Some exchanges provide commission-free trading, but the majority of them levy transaction fees ranging from roughly 0.1 percent to 1 percent of the total value of the traded asset.
There are additional costs for making online deposits, as well as fees for making withdrawals and closing accounts.5
It is recommended that you keep a watch out for changes in fees on cryptocurrency exchanges, according to GoBankingRates, because they can change often and with little notice.
How to Be Ready for the Next Crypto Tax Season in the United States
When it comes to cryptocurrency taxes, preparing and submitting them may be a time-consuming procedure. Especially if you’ve never done it before. The first stage is the most significant and time-consuming component of the filing procedure. Compiling a comprehensive list of all of your crypto-related activities.
Some people may just need to log one or two trades to meet the requirements. The work can, however, be overwhelming for more experienced investors who have dabbled in NFTs, yield farming, airdrops, and other sorts of cryptocurrency trading. In order to avoid having to complete everything at once, it’s typically a good idea to keep track of your trades as you go along during the tax year.
After you’ve accomplished the first stage, you’ll need to figure out whether you’ve made any capital gains or losses. It is possible to outsource this task to a variety of platforms, some of which provide free trials and may contain all you want to finish this next step.
From there, you’ll need to fill out Form 8949 and attach it to Form Schedule D to complete the process. Any crypto assets earned as income must be included on Schedule 1 of Form 1040, and any crypto assets earned as self-employment income must be included on Schedule C of Form 1040.
How Can I Avoid Having to Pay Taxes on Cryptocurrency Earnings?
In the same way that you can avoid paying taxes on stock profits. You can avoid paying taxes on any cryptocurrency you possess as an investment: Don’t try to sell. It is the act of exchanging your bitcoin for cash that constitutes a taxable event.
If you earn money via cryptocurrency mining, the earnings from your mining operations are subject to standard income taxation. You may be able to deduct your company expenditures from your income in order to reduce your tax liability. A tax specialist can assist you with the specifics of your situation.