Despite the absence of a global consensus on cryptocurrencies as a legitimate asset class, cryptocurrencies are subject to taxes whenever its season comes around – especially since they appear to be rapidly gaining traction.
Regardless of this, the perceived complexity of crypto taxes has made it such that few file them while others neglect them. However, as regulatory bodies in the US like the Internal Revenue Service (IRS) shifts their focus to crypto assets, it is becoming paramount – as a crypto holder – to understand the basis of crypto taxes and how to file them.
In this piece, we will explore the world of crypto taxes and how best you could approach the tax season when faced with it.
Tips on Cryptocurrency and Taxes
- Crypto Taxes Are of Two Main Types
Under the IRS jurisdiction, crypto taxes are classified as either capital gain taxes or income taxes. For capital gain taxes, cryptocurrencies are classified as property and not currencies under the IRS regulations. As such, capital gain taxes are expected to be paid as dictated by the law.
However, capital gain taxes are classified and filed according to how long you’ve held them. Hence, under the payable capital gains taxes, crypto holders are subject to short term taxes or Long term taxes.
The Short term taxes are applicable to holders with cryptocurrencies held for less than a year and the Long term taxes are applicable to crypto holders with assets held for over a year before trading.
Income taxes, on the other hand, are paid on earnings in crypto. This is such that when you get paid in cryptocurrency, you are subject to paying taxes in crypto equivalent to the US dollars.
- Crypto Miners are Also Taxed
Crypto miners are generally seen as self employed and hence, are subjected to income taxes. This means that they are required to pay taxes with reference to their earnings which under the tax law rounds up to about 15.3%. The plus, though, remains that miners get to deduct expenses from it.
- Crypto Tokens are Not Taxable Assets
Under the IRS jurisdiction, cryptocurrencies subject to taxes are categorised by their equivalence in value to fiat currencies or their use as alternative forms of currency. Tokens are generally not considered in this variation and as such, are exempted from tax compliance.
However, in some cases, tokens are reclassified and redefined. Thus, for better understanding of which crypto asset is classified as a tax-exempt asset, it is best to consult a law agent or a certified tax agent.
Before Going through the Crypto Tax Process
With the IRS increasingly placing their attention on the crypto world, paying taxes as a US citizen or crypto holder in the US is paramount. The major challenge, though, remains that the data required to make up the filing process is a testament of the complexity of the tax filing process.
This is why it is important to gather enough data to get through the tax calculations and the entire process. So, here are some of the fundamentals you must run through before moving on:
- Maintain All Data on the Exchanges Used for your Crypto Trading
This works like a typical bank statement. The tax reporting process requires your complete trading history for the calculations due. Hence, it is important to take note of the exchanges used for either purchase or sale of your crypto assets.
In most cases, exchange data are quite detailed and these detailed lists aid in proper calculations and evaluation of your holdings.
- Keep Track of All Crypto Assets Received as Income
As mentioned above, cryptocurrencies are mostly classified according to their mode of entry into your wallet and the length of time spent there. This is why it is important to particularly keep a clear record of which cryptocurrency was earned and how it was earned.
It is important to note that cryptocurrencies earned as income are treated differently from cryptocurrency traded. Hence, it is important to keep detailed records to avoid filing wrongly.
- Report Your Losses
The constant crypto storms that have been known to take off a significant value of the prices of cryptocurrencies at large has made it such that capital losses are not new. There are possibilities that you might have to sell off your coins at a lower price than the one at which it was bought.
This means, instead of paying taxes on capital gains, you get save more money on your tax bill. Thus, apart from noting details of the capital loss made and reporting it, you could use this as a leverage to gain from other trades or add to your portfolio from other asset classes.
- Know Your Calculations
This is one of the most important points to take note of when thinking of filing a tax. It is therefore imperative to get the fundamentals on the payable taxes – especially the capital gains taxes- and their intrinsic portions.
Majorly, capital gains tax involves tax payable upon each gain made on every digital asset traded. Here, the first thing to note is the USD equivalence of the crypto when acquired (which is technically referred to as the cost basis) and the amount for which it was sold.
Then, the next thing is to note is fair market value – which simply how much it was worth when sold. Hence, the capital gain or loss is the difference between these values. This is exactly why it is imperative to keep a record of all cryptocurrencies trade and bought.
- Consult a Tax Specialist
Crypto tax filing processes can be complex, tedious or even simple depending on your base knowledge. Regardless of your issue, the process can be simplified with the help of a crypto tax specialist with due knowledge and experience.
This method takes the hassles of the entire process away by giving you relevant information on how to go about things while proffering solutions to every challenge that might occur in the long run.
Though tax seasons are not exactly a part of the year looked forward to especially with the complexity, it doesn’t necessarily have to be tedious. As with paying taxes on other assets, crypto taxes payments run along the same line albeit relegating the gathering of all relevant information to the investor.
Hence, it is important to gather and keep all relevant records to ensure the process is simple enough. In addition, there are possibilities of updates in the current regulations and this is why it is important to keep going over every information released by the said regulatory body to keep up with required compliance.