Every investor knows that assets are something to consider at tax time. Cryptocurrency is no different than any other asset class. The problem is that taxes are a complex matter where digital currency is concerned. This means that many investors make the mistake of doing nothing at all when it comes time to file their yearly return. The failure to address matters of taxes and crypto can lead to problems for the investor.
The thing is that cryptocurrency is becoming more popular and widely accepted as an investment vehicle. This means that it is on the IRS radar. It is very important today for those who have profited from crypto investments to make the necessary adjustments on their tax returns. Here are some things you should know when tax time comes around.
The IRS is Wise to Cryptocurrency
There was certainly a time when you could fly under the radar with cryptocurrency investments. Today, that is much harder to do. The IRS is always the first to recognize new asset classes. Some mainstream investors might not be taking Bitcoin and other digital assets seriously, but the IRS is.
Refusing to pay taxes on cryptocurrency profits could be considered tax fraud. If you defiantly refuse to pay crypto taxes you could be charged with tax fraud. The penalty for tax fraud is very severe. If convicted you could serve up to five years in prison and be hit with a $250,000 fine. It just isn’t worth the risk.
Granted, you may be a small fish in the crypto pond. Your level of investment might not be caught by the IRS. Even so, it is best to get on the right side of the matter from the beginning and keep your matters in order.
Cryptocurrency Trades and Sales are Taxable
Believe it or not there is still a perception that taxes don’t apply to cryptocurrency because the asset is not physical. Some people also mistakenly believe that anonymity will protect them when it comes to Bitcoin. Both of these assumptions are false.
Every gain and loss on individual trades must be reported to the IRS. These are just some of the taxable scenarios that involve cryptocurrency:
- Trading one token for another
- Converting crypto to cash
- Spending cryptocurrency
Any of the above may be reason for adding cryptocurrency to your return.
It is worth noting here that Coinbase, a major cryptocurrency exchange, was the subject of a court case in 2017. The case required the exchange to provide information to the IRS on all investors that have traded more than $20,000 in cryptocurrency.
Cryptocurrency is Regarded as Property
The IRS views cryptocurrency in a different light than some other asset classes. It regards crypto as personal property. This means that all crypto investments are subject to what is known as the capital gains tax.
This is where things get a little confusing. Capital gains taxes are assigned to one of two categories. There are long-term and short-term capital gains. A long-term designation is applied when you held on the crypto for a year or more before selling it. If less than a year, the designation is short-term. Long-term capital gains taxes are usually less than those for short-term gains.
The state that you live in and your personal tax bracket will determine how much tax you have to pay. It is also possible that your crypto holdings can be subject to personal income tax. This comes into play often for freelancers and other individuals who are regularly paid in crypto by their clients.
Miners Must Pay Taxes on Cryptocurrency
Those who mine cryptocurrency are also subject to filing taxes on the profits they receive. Mining is the process of solving mathematical equations that are used to verify transactions and add them to the blockchain. Miners receive a reward for successfully processing a transaction.
In recent years it has become increasingly difficult for the hobbyist to make a profit from cryptocurrency mining. The cost of purchasing and maintaining equipment has become exorbitant, and there is also money that has to be spent on mining resources. Some individuals find it to be more profitable when they join a mining pool or collective like the one offered by Genesis Mining.
Even if you are part of a mining pool you are still subject to taxes on the cryptocurrency that you earn from mining. This means keeping detailed records of all your earnings and rewards.
No Taxes Are Paid on Held Crypto
There is one piece of good news when it comes to cryptocurrency and taxes. There is no tax obligation if you simply buy crypto and hold onto it. You can invest all you like in Bitcoin, but until you decide to sell the asset you are not responsible for paying taxes.
Some people use this as an encouragement to purchase cryptocurrency and hold on to it. Most people that are involved with crypto see the vast potential in Bitcoin and other investments to appreciate in value. You should consider the same mentality. Always remember that cryptocurrency investing is just like any other type of investment. It carries an inherent risk, and there is no guarantee that you will return a profit.
Still Have Questions About Cryptocurrency and Taxes?
After reading this article you may still have some questions about cryptocurrency and taxes. Our recommendation is that you visit with your accountant or tax professional about any concerns that you may have. They should be able to give you the sound advice that you need to make wise decisions.
*** Here at CryptoSwede you will find information on Crypto Mining the different cryptocurrencies as well as the best cryptocurrency exchanges. You can trade or you can set up trading bots instead and then store the crypto on crypto wallets. Later, spend them using crypto debit cards!***