With the rise of Bitcoin in the past year, many taxpayers have invested in various cryptocurrencies in hopes of gaining profit. Cryptocurrency is a “virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.” Taxpayers are required to report such gains on their tax return if they have bought, sold, or traded cryptocurrency.
Cryptocurrency has been around for a substantial amount of time. In 2014, the IRS ruled cryptocurrencies to be treated as a capital asset instead of a currency. While there are some exceptions to this rule, crypto is generally taxable in the same vein as stocks and bonds.
Determining Whether Your Cryptocurrency Is Taxable
The general rule for paying crypto taxes is that you must report any gains or losses for every crypto transaction you make– even if the transaction is not material.
Cryptocurrency held as a capital asset must be treated as property for tax purposes. Any gain or loss you receive from selling or exchanging an asset is taxable as a capital gain or capital loss. If you did not profit from exchanging cryptocurrency, you won’t owe any taxes for said transactions.
If you have used cryptocurrency to purchase goods, services, or even other cryptocurrencies, these transactions are taxable.
The phrase “crypto mining” refers to the gain of cryptocurrencies through solving complex cryptographic equations via a computer. Any profits made from mining are taxable, as per the IRS.
Reporting Cryptocurrency To The IRS
Once you have determined whether or not your crypto is taxable (it probably is), you must begin the tedious process of reporting your crypto. Although you may find yourself overwhelmed with the thought of reporting your crypto earnings and losses, the process is actually quite simple.
Calculating Your Crypto Taxes
Most crypto platforms already have automatically generated reports on your cryptocurrency exchanges. You can simply print out these reports if your chosen platform has been generating such reports. However, if your preferred platform does not generate reports on your behalf, there are many third-party services that will do so for you at a nominal price.
Once you have calculated your cryptocurrency gains and losses, you must fill out IRS Form 8949. Form 8949 will require you to explain the following:
- A description of the property sold
- The date you initially received the property
- The date you sold or exchanged the property
- The fair market value of the transaction
- The cost basis of the property
- Whether or not the exchange was a gain or loss
After you have finished filling out Form 8949, you must take the calculated net gain or loss reported on Form 8949 and include it with your Form 1040 Schedule D. The Schedule Form is a report of your total gains and losses from any source of income.
You Must Report Any Crypto Income You Have Earned
Cryptocurrency occasionally can be reported as ordinary income on the Schedule 1 form instead of as a capital gain. For example, crypto mining and staking, hard forks and airdrop, as well as crypto lending interest are considered income. In this situation, cryptocurrency as income must be reported on Form 1040 Schedule 1 under “Other income.”
Tax Day Is Coming Up– Don’t Wait Until The Last Minute!
Although Tax Day has been extended from April 15 to May 15, it is in your best interest to understand what crypto earnings can be taxed and how to proceed. Taxes are already complicated. Adding cryptocurrency taxes on top of that can complicate things even more. In order to stay on top of your taxes and prevent back taxes from occurring, make sure to fill out your required tax forms properly.
If you are struggling with back tax debt owed to the state or IRS, reach out to Lifeback Tax today! Our specialty is tax resolution and we’ve helped countless clients across the nation achieve settlements with state and IRS authorities. While the best tax resolution is simply doing it right ahead of time, feel free to contact us for FREE, no obligation consultation.
Rajneet Kaur, EA, MBA, Certified Tax Resolution Specialist is the Company Director of LifeBack Tax. LifeBack Tax is a tax resolution firm based in Chatsworth, CA that specializes in determining structured solutions for clients who owe back taxes to the state or IRS. With over 16 years of experience in the industry, Rajneet and her team have been able to resolve state and IRS debts for countless clients across the nation! To get in contact with Rajneet and the LifeBack team, call (855) 605-1500 or send an e-mail to [email protected]