Most cryptocurrencies are convertible virtual currencies, according to the Internal Revenue Service (IRS). They can therefore be used in place of real money and serve as a means of exchange, a store of value, a unit of account, and a unit of worth. Additionally, it implies that any earnings or revenue derived from your cryptocurrencies are taxed. Speaking about earnings, if you are interested to earn from bitcoin trading, you may use a reliable trading platform like the Bitcoin Code software. However, there is a lot to understand about how cryptocurrency is taxed because, depending on the circumstances, you might or might not owe taxes. Knowing when you will be taxed is crucial if you already own or use cryptocurrencies so that you are not taken aback when the IRS comes to collect.
When do you owe tax in cryptocurrency?
- Like selling a share of stock, if you make money selling bitcoin, you must pay capital gains tax on those earnings.
- You must pay taxes on the difference between the price you spent for the cryptocurrency and its value at the time you paid it if you use it to purchase goods or services.
- You need to declare bitcoin revenue if you accept it in exchange for products or services.
- The value of your coin now it was mined qualifies as company income if you mine cryptocurrencies.
You are not required to pay taxes to own a cryptocurrency; they are tax-free on their own. The IRS treats cryptocurrencies as assets for tax purposes. In simpler words:
- If you sell or use bitcoin in a transaction, you must pay taxes on it. It is because of its market value changes; you will experience capital gains or losses.
- Cryptocurrency payments made for commercial purposes are subject to taxation as business income.
Cryptocurrencies can produce rewards akin to investments because their market value fluctuates. You must pay taxes on any gain you realize when you sell or swap crypto with a higher value.
How to file cryptocurrency taxes?
1. Maintain proper record of all transactions
You must keep a record of every cryptocurrency transaction you make, including the cost of the cryptocurrency, the length of time you held it, the price you received when you sold it, and the receipts for each one.
2. Fill out adequate tax forms
Depending on how you utilized your cryptocurrency, you will need to complete specific tax forms after you have a log of your transactional cryptocurrency activity.
3. File your taxes
There are several applications available online for filing taxes. You may use one of those for easy tax filing.
How can you minimize crypto taxes?
- Gains from cryptocurrency investments are taxed at the favored long-term capital gains rate if you keep them for at least a year before selling them. This can practically cut your tax rate in half, from the highest rate of 37% for short-term gains to the highest rate of just 20% for long-term gains, depending on your taxable income for the year.
- You can benefit from cryptocurrency profits by deducting losses from other investments in the year you realize your profit, just like with any other investment. Accordingly, if you made $10,000 from selling Bitcoin but lost $10,000 from selling Ethereum, you would have broken even and wouldn’t have to pay any taxes.
- Check the remainder of your portfolio to see whether there are any other losing assets you can sell to offset your gains when you are about to cash in sizable crypto investment.
- Although mining cryptocurrency may appear to be inexpensive in theory, there are significant costs associated with the process, including those for computers, servers, electricity, and internet service providers. If you mine cryptocurrencies, you can subtract these expenses from your profits.
- If you decide not to use the entire earnings from your cryptocurrency investment, you can reduce your tax liability by giving at least some of it to charity. Any gains will be deducted from the whole value of your cryptocurrency deduction.
When trying to file bitcoin taxes, especially for the first time, it is important to consult with a licensed accountant if you have any questions. Except for not utilizing your cryptocurrency, there are no legitimate ways to prevent paying taxes on it; in this instance, you will have to pay taxes when you end up selling, using, converting to fiat, swapping, or trading it.