Cryptocurrency Tax - What You Need to Know

With the rise of digital currencies like Bitcoin, Ethereum, and Litecoin, we’ve also seen an increase in news articles about taxes. Is taxing cryptocurrency as much of a hassle as everyone makes it sound? Absolutely not. In fact, it’s actually pretty simple if you understand how each piece fits together. There are plenty of resources out there on how to file your taxes if you own cryptocurrency and some may even be more complicated than they need to be. This article is going to break down what you need to know about crypto taxes so that things are simple and straightforward when tax season rolls around again.

What is Cryptocurrency Tax?

Tax is a financial obligation that you pay to the government. The type of tax you pay will depend on your circumstances. The most common types of taxes are income tax, capital gains tax, and sales tax. In the context of cryptocurrency, tax is the government’s share of your investments. If you buy cryptocurrency, hold it for longer than a year, and sell it for more than you bought it for, then you have a taxable gain. Most countries have a capital gains tax, and although it varies from place to place, the general idea is that you’re taxed on the difference between what you bought the asset for and what you sold it for.

How to Record Your Crypto Transactions for Tax Purposes

The first thing you need to know is that cryptocurrency is, for tax purposes, a “property”. This means that you’ll record your transactions and calculate gains or losses the same way you would stock shares or a piece of real estate. This is different from how you’d report transactions involving “currency” like dollars. When it comes to tracking your crypto transactions, the first thing you’ll want to do is open a virtual wallet. There are a number of online wallets that allow you to store your crypto assets, but it’s important to keep in mind that these are third-party services, meaning that you don’t actually have control over your private keys. This means that if the service shuts down or if hackers break-in, you don’t have any way of regaining access to the assets. That being said, there are also wallets you can download and install on your computer that do grant you full control over your private keys.

Record of Losses from Crypto Transactions: aka “Trading Losses”

Even if you make money on a crypto investment, you may still have to pay taxes on that profit if you made a “realized gain”. A realized gain is when your investment is worth more than what you bought it for, and it can trigger a taxable event. When it comes to realized gains and losses, there are two important things to keep in mind: timing and quantity. Timing: A realized gain occurs when you sell an asset. If you sell an asset and it’s worth more than what you bought it for, then you’re likely to have a realized gain. Quantity: You want to make sure that you record your realized gains and losses in the right column on your tax return. If you have a realized gain, then you’ll mark it down as a capital gain. Likewise, a realized loss is considered a capital loss.

When are Taxes Due if You Own Cryptocurrency?

This is one of the questions that many people have, and there are a few factors that you need to consider. First, if you made money from your crypto investments, then you have to pay taxes on that. That being said, if you’re in a low-income bracket, then you may be able to get away with not paying taxes on your crypto gains. On top of that, you also need to consider whether or not the IRS views your crypto as a “trade or business”. The IRS treats crypto as a “property”, so if you use it as a business, then you’ll have to pay taxes on it as if it were a job.

Which Crypto Assets are Taxable?

Cryptocurrencies only became taxable as property in March of 2014 when the IRS issued a notice to all taxpayers. This means that all of the major cryptocurrencies were taxable from the get-go. Keep in mind that when you report your crypto transactions on your taxes, you have to report the dollar amount of your investment, not what it’s worth. If you bought 1 ETH for $100 and sell it for $800, you’ll report $800 as your income. There are a few exceptions to this general rule, but for the most part, if you own crypto, then you have to report it for taxes.

Conclusion

Cryptocurrency is a new asset that is often misunderstood. While it may seem complicated at first if you understand the basics and what each piece of the puzzle is, it’s actually pretty simple. The first thing you need to know is that cryptocurrency is a “property”. This means that you’ll record your transactions and calculate gains or losses the same way you would stock shares or a piece of real estate. The second thing to know is that the IRS treats crypto as a “property”, so if you use it as a business, then you’ll have to pay taxes on it as if it were a job. Third, if you made money from your crypto investments, then you have to pay taxes on that. On top of that, you also need to consider whether or not the IRS views your crypto as a “trade or business”. There are a few exceptions to this general rule, but for the most part, if you own crypto, then you have to report it for taxes.