By James Davis
Millions of Americans are now involved in the crypto world in various ways, including mining, trading and investing in Decentralized Finance (DeFi) projects. As many would expect, tax authorities have established policies requiring anyone engaging in this nascent industry to report their taxes.
So whether you’re just getting started or have been trading crypto for a while, you should report your income per the stipulated regulations. But the process can be complex for some. This article looks to answer various questions in regard to crypto taxes. Please keep reading to discover more.
Why Do You Need to File Crypto Taxes?
You need to pay crypto taxes because the law requires you to do so. While many may argue that the exchanges they trade on report taxes on their behalf, the law requires that you file your taxes independently, failure to which you may be subject to an investigation.
Moreover, the US Internal Revenue Service (IRS) has claimed that most exchanges have not been complying with tax-related rules and are now demanding more reporting from these trading platforms. IRS announced last year that it was looking to increase its budget to ensure full enforcement of crypto taxes.
Can You Legally Evade Taxes on Crypto?
If you buy and sell cryptocurrencies regularly, there are taxes that will be imposed on your trading earnings. However, paying zero tax on these earnings is possible if you gift your crypto to relatives or donate it to charity. In addition, the beneficiary won’t be charged a gift tax.
IRS Treats Crypto Profits as Capital Gains Income
If you have made profits and reported taxes on traditional financial assets such as bonds and stocks, you will realize similar taxation aspects in crypto. That’s because the IRS considers crypto as property, just like stocks or bonds. With that said, the agency requires you to pay capital gains taxes if you profit from crypto trading.
It is worth noting that these capital gains taxes can be long-term or short-term. If you held the crypto for less than 12 months, you would pay a short-term capital gains tax of between 10% to 35%. If you have owned it for over a year, you will pay long-term capital gains taxes ranging between 1% to 20%.
Crypto Taxes Extend Beyond Just Trading
On top of reporting trading earnings, the IRS required any consumer making purchases using crypto to report such transactions on their tax returns. It is easy to argue that buying crypto and using it to make purchases is not in any way a form of income, but as per IRS, that crypto could increase in value, and if it does, the difference between the buying price and the current market price of that crypto is considered a capital gain and should be taxed. Furthermore, IRS requires any employee paid in crypto to report their income to the agency.
Can the IRS track crypto?
One indication that the US tax authority is tracking crypto income is that it includes a section on Form 1040 asking taxpayers if they are involved in any crypto-related activities. IRS requires you to disclose if you have ‘sold, received, or acquired an interest in any digital asset.’ The agency also warns that providing false information could lead to some serious consequences.
How to File Crypto Taxes
Having discussed issues around crypto taxation, we can now look at the tax payment process.
First, you will need to report all relevant trades and transactions. After that, determine your capital gains or losses, and this can be done by subtracting the cost basis of the assets from the sale price. Once done, Fill out the IRS Form 8949 to record all the taxable transactions and transfers the totals from this form to 1040 Schedule D.
If you were paid for work in crypto, the IRS would consider your salary self-employment income, which means you will be subject to self-employment taxes.
As you can see, filing crypto taxes can be a bit complicated, but keeping a detailed record of all your transactions and trades can make the process easier. If possible, seek the services of tax professionals to help you understand the more complex aspects of crypto taxes.