The key to properly taxing cryptocurrencies is to maintain a good record, the correct IRS taxation form, and an understanding of what constitutes income and capital gains.
Handle tax filings carefully to avoid any review
Although the traditional deadline for filing U.S. taxes on April 15 has been postponed to May 17, there is no such time to organize cryptocurrency transaction records.
At this point, all cryptocurrency transactions need to be taxed in certain constellations, so it’s important to be familiar with the nuances to ensure that the accompanying tax forms are filled out correctly. In order to provide you with an exclusive channel to simplify internal documentation, Bitcoin.com has solicited suggestions from Shane Brunette, CEO of Cryptotaxcalculator.
How capital gains in cryptocurrencies work
Just as stock sales can bring positive returns and lead to capital gains tax exposure, cryptocurrencies operate in a similar way. However, the exchange of cryptocurrency for legal tender is only one type of taxable event.
According to brunette,
Cryptocurrency-to-cryptocurrency transactions trigger capital tax events, while transactions such as airdrops and equity rewards are classified as income. The important thing is that you can only use capital losses to discount up to $3,000 from any “income” earned in cryptocurrency.
This means that the conversion of cryptocurrency to fiat currency, another cryptocurrency or the use of cryptocurrency to purchase goods and services can all be regarded as capital gains events. As far as the tax rate is concerned, it depends on how long the cryptocurrency is held.
For short-term transactions or activities (less than one year), any income will be taxed at the personal income tax rate. Cryptocurrencies held for more than one year may be taxed at a lower tax rate, ranging from 0% to 20%, depending on the individual’s income tax level.
When crypto gains are seen as gains rather than capital gains
As mentioned above, not all crypto transactions fall into the scope of capital gains. Many other potential activities can be classified as income categories.
This includes any income from cryptocurrency mining, liquidity pools, node mortgages and verification, interest earned from decentralized finance (defi) loans, and any income received from encrypted payments for goods and services.
When income is obtained from any of the above activities, it shall be taxed at the same current tax rate that the individual paid for other income received during the year.
Airdrops, rewards and giveaways
Like mining and betting rewards, cryptocurrency airdrops, rewards, gifts and even bug bounties are also considered crypto income. Since these activities will generate some kind of income from the crypto ecosystem, they are classified as income taxes and not considered as capital gains and losses.
How to extract transaction records
Due to the lack of uniformity between the various platforms, extracting information may be very simple, or it may cause some confusion. Therefore, you must maintain good records and ensure that you can consolidate all transactions into one report to make filing easier.
The “black hair” of Cryptotaxcalculator adds the following valuable and feasible tricks,
Calculate costs carefully. You will be surprised to find the total amount of money saved so quickly. If the fee is paid in cryptocurrency, you also need to consider the capital gain/loss of the fee itself.
Forms you need to prepare
After summarizing all cryptocurrency transactions conducted before 2020 and determining whether they are capital gains or income, the declaration process can begin. Depending on the nature of the transaction, several forms need to be filled out.
Per Shane brunette,
Form 8949 and Schedule D are used to report capital gains, but if you have any transactions classified as income, you also need to complete Schedule 1 (Form 1040).
Some final thoughts on taxes
As access to the cryptocurrency ecosystem becomes easier, taxable actions are gradually increasing. Fortunately, taxing cryptocurrencies is easier than ever, and organization is a key element of this work. Brunette concluded in the final feasible recommendations that the best preparation starts with excellent record keeping.
Keep your records up to date throughout the year. Even moderate trading activity can quickly add up to hundreds of transactions, and IRS requires you to record everything in U.S. dollars. If you took some time to install the automatic tax software at the beginning, it will not be so easy to file the tax at the time of tax payment.
Do you plan to do the crypto tax yourself, or do you plan to hire an accountant to do it for you? Let us know in the comments section below.
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