4 Common Tax Questions Crypto Users Ask
We can no longer deny the impact of crypto in today’s financial markets. Currently, there are more than 68 million crypto users who use digital currencies to pay for goods, create long-term investments, or as a main source of income. And as more cryptocurrencies enter the market along with their loyal supporters, the number of blockchain wallets is also expected to grow exponentially.
Despite the prevalence of crypto, not everyone is aware of how they can pay taxes for their crypto transactions — mostly because there are a lot of doubts and ambiguities surrounding crypto taxes. However, the IRS has made the effort to squash the vagueness around crypto taxes and has recently issued new guidelines. Without further ado, let’s try to answer the burning questions that most crypto users ask.
Is it necessary that I file taxes for my cryptocurrency?
Definitely. And this answer was true even before the IRS began asking about cryptocurrency on Form 1040. But, answering yes doesn’t mean that you’ll automatically owe any taxes. For example, you won’t have to pay any taxes if all you were doing was holding crypto in a wallet. The IRS only wants to be aware of how much crypto you have in your wallet and wants to have accurate information about your holdings. If you fail to report income or capital gains from cryptocurrency, you may be slapped with a hefty fine, owe tax debt to the agency, or even be criminally prosecuted.
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
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What kind of taxes are cryptocurrencies subjected to?
According to the United States Securities and Exchange Commission, Bitcoin and other cryptocurrencies are not considered as securities. Because of this, the IRS treats cryptocurrency transactions as property transactions. For instance, selling crypto within a year of purchasing it will subject the transaction to Short-term Capital Gains Tax (SCGT). On the other hand, waiting more than a year to sell your crypto will require you to pay Long-term Capital Gains Tax (LCGT).
How do I report cryptocurrencies on my tax returns?
On IRS Form 1040, you need to check “yes” to the question: “At any time in [year], did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” to report your crypto gains or losses on your tax returns. After that, you can create a crypto tax report by filling out the IRS Form 8949, which is used to monitor the cost basis for each of the crypto you use and their sale price. After that, you also have to divide your crypto transactions between short-term gains and long-term gains. Finally, you’ll have to complete Schedule D of Form 1040 using the information you’ve gathered in Form 8949. This will let you know exactly how much tax you owe on your crypto gains.
If my salary is paid in crypto, how can I report this since the price of crypto fluctuates?
When calculating your taxes, the salary you receive in crypto will be subject to income taxes. Thankfully, receiving compensation in crypto is not as complicated as reporting crypto gains. You won’t need to worry about crypto price fluctuations as the fair market value of the cryptocurrency on the date you were paid is what will be added to your gross income. Because of this, it’s crucial that you keep accurate records so you can prove when your crypto salary was deposited to your account.
If you want to have a smooth crypto career and prevent yourself from running into trouble with the IRS, you should educate yourself on how the agency treats crypto gains. If you still have a lot of confusion when it comes to crypto taxes, be sure to employ the services of a trusted CPA in your area.
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