As cryptocurrencies take over the financial world, it is vital to get a firm grip on the fundamentals. This is especially true for aspiring crypto traders.
While the confusion surrounding the subject, owing to amorphous crypto laws and the unique nature of crypto is entirely understandable, there are some concepts that you should attempt to comprehend to get a clearer picture of everything crypto-related.
Understanding cryptocurrencies, filing crypto taxes, crypto tax calculators and online tax tools, and so forth will turn out to be a breeze here on in. If you are a complete beginner and find yourself wondering how to report crypto taxes, read on.
What is Cryptocurrency?
Answering your question of how to report crypto taxes will be redundant if you haven’t a clue on cryptocurrencies.
Simply put, a cryptocurrency is a digital medium of exchange that uses strong cryptographic functions to verify and then secure financial transactions. Its most significant characteristic is the absence of a central regulatory body, which is not the case with traditional FIAT currencies.
Cryptocurrency’s Important Characteristics
Cryptocurrencies are entirely different from every currency or asset on the market in terms of the way they operate. Here’s how.
- Crypto transactions are irreversible. Once performed, you cannot undo or reverse a cryptocurrency transaction irrespective of your actions. No bank or any other central authority can be of assistance as they have no control over cryptocurrency transactions.
- The cryptocurrencies transactions that you carry out are on addresses that contain chains made up of multiple characters. You can analyze the flow of the transaction, but you cannot trace the real-world identities of the crypto accounts with whom you carry out crypto operations.
- Crypto transactions are recorded on a distributed ledger, which means that there is no single point of susceptibility. This payment system is secure as every component in the network has a copy of the ledger, which means that every transaction can be verified with this ledger. The chances of hacking the system reduce drastically, which is not the case with a centralized system.
- As mentioned, cryptocurrencies operate in a decentralized system, which means that you do not need permissions to use cryptocurrencies.
Crypto Tax
The tedious process of filing crypto taxes is what makes people reluctant to get into the crypto-world. You can drastically ease the process of filing crypto taxes by using cryptocurrency tax calculators.
An important thing to keep in mind is that cryptocurrencies are taxed the same way property is under federal tax law in the US. In other words, cryptocurrency transactions are subject to capital gains, just as the property is taxed. Capital gains should be reported on the 8949 form. If you want to find out how to report crypto taxes, here are a few things to keep in mind:
When do you owe crypto taxes?
- You will have to pay crypto taxes when you sell cryptocurrencies for FIAT currencies
- You owe crypto taxes if you choose to trade your cryptocurrencies other cryptocurrencies
- If you use cryptocurrencies to pay for goods and services
When do you not have to pay crypto taxes?
- If you decide to donate your cryptocurrency to a tax-exempt charity or organization
- When you transfer small amounts of your cryptocurrency as a gift, as long as they do not exceed $15k
- If you move your cryptocurrencies amongst your wallets
- If you purchase cryptocurrencies using your FIAT currencies
- Should you decide to lend your cryptocurrency
If the value of cryptocurrency appreciates, the profits that are generated on it constitute a capital gain.
If the value of your cryptocurrency depreciates, you can deduct the losses incurred against the other capital gains you may have in order to reduce to the crypto tax.
The IRS’ Stance on Reporting Crypto Taxes
The Internal Revenue Service (IRS) recently released a new Schedule 1 form for the 2019 tax season, where they detail the above-the-line deductions, which include the tax break for student loan interests and health savings account contributions.
The agency wants to find out if you’ve acquired, exchanged, or sold a financial interest in virtual currency.
In July 2019, the IRS had sent over ten thousand letters to crypto taxpayers who failed to report crypto taxes, informing them that they had to them and file amended returns.
Failure to accurately report these transactions can be detrimental. You may be audited and penalized. In extreme cases, you are likely to face prison time and pay a fine of up to $250,000.
Considering the strict punishments that the IRS promises to enforce, it is highly recommended that you report your crypto taxes on time. If you don’t know how to report crypto taxes, consider using a crypto tax calculator.
Crypto Trader Tax Report Tools
These tools are at your disposal if you wish to know how to report your crypto taxes without much hassle.
Cointracking.info
Known as one of the most comprehensive tools for crypto tax reporting, Cointracking.info can import data from 54 trading platforms, including Cobinhood, KuCoin, and Hitbtc, among many others.
The platform allows crypto traders to keep track of all their trades, regardless of the platform and provides price trend overviews. Cointracking.info is known to support every cryptocurrency out there.
CryptoTrader.tax
CryptotTrader.tax allows you to import your crypto income and trades into its program, where it will calculate your gains and taxes.
You can expect the program to prepare your tax form, so you do not have to put in the effort of having to do mind-numbing calculations.
CryptoTrader.tax works in any country. You can choose from a wide range of FIAT currencies in your account settings.
Bitcoin.tax
This is yet another sound solution if you are yet to figure out how to report crypto taxes. Bitcoin.tax provides a tax professional directory for tax services that include attorneys for tax advice or tax planning. Be sure to note that only Bitcoin tax professionals are listed in this directory.
This crypto tax reporting tool allows you to import your mining rewards from your wallet addresses.
