Cryptocurrency can be challenging for people to understand. The concept of a digital currency with financial value without a physical form is unfamiliar to us. This new platform has brought many companies to bring forth variations of cryptocurrency. Bitcoin, Ethereum, Dogecoin, and Tether are just a few that have grown steadily over the past few years. Each has its own market share and process making it complicated to know where to invest.
If the concept of Cryptocurrency is challenging to grasp, calculating any taxes owed on it may seem impossible. The good news is that the IRS has clearly defined the tax laws for cryptocurrency. The bad news is that understanding and deciphering those tax laws are always where the challenges arise! The most important thing to know is that the IRS considers cryptocurrency as property and not as currency. This fact drives how you must report your exchanges. Each transaction you make with crypto could have an impact on your taxes. While there are many small details, cryptocurrency has three main ways to impact your taxes. Here are the basic guidelines for each of those.
Did you get paid for services in Cryptocurrency?
Although it is not mainstream for workers to be paid in Cryptocurrency, there is a trend in some industries for this to happen. You must file this on your tax return if you are a freelancer or a worker in an industry that gets paid in crypto. The value is taxable when you are paid for your services. Since the IRS considers crypto as property, you must know the fair market dollar value of it on the day on which you received it. This amount is considered earned income and must be filed on your tax return for that year. Keeping good records will help you drastically when the time comes to file your return.
If you are mining cryptocurrency, you will likely be rewarded a percentage of cryptocurrency. This reward is considered income and must be claimed as such on your tax return. You may receive a 1099 statement for this work, but even if you do not, the income must be reported to avoid any penalties and interest that could occur in the future.
Did you sell your Cryptocurrency and see a return?
You don’t have to own cryptocurrency to understand how volatile the market is. We see it almost every day on the news and social media. The up-and-down waves of the market can be challenging to ride, even for the savviest of investors. Understandably, those realizing even the slightest gain may decide to offload their investment and move into something more stable.
When you sell or exchange your cryptocurrency for actual currency, that gain will be taxed at the capital gains tax rate. This also includes exchanging your bitcoin for goods or services. This is because of the IRS classification of it as property. Within the capital gains tax code, there are two subsets.
- Short-Term Capital Gains – If you purchased or received cryptocurrency and sold it within one year to realize a gain, your tax will be calculated using this table. Your income and filing status will determine the percentage paid. It averages between 10% – 37%.
- Long-Term Capital Gains – Holding onto your cryptocurrency for one year or longer could reduce your tax impact significantly. Any gains made after the one-year mark will be taxed using the long-term capital gains table. Again, based on your income and filing status, you will be taxed between 0% – 20%.
Did you sell your Cryptocurrency and experience a loss?
After the drastic decrease in the value of cryptocurrency this year, many people who disposed of theirs will fall into this category. You may still be stinging from the loss of money from your crypto investment, but at least you can deduct the loss from your taxes. To calculate your exact loss (you may not really want to know, so have your accountant do this,) deduct your final selling price from your initial purchase price. This number can offset any capital gains you may have had or reduce your income. There are limitations to the dollar amount per year that can be deducted. Check with your tax advisor to better understand those.
Use a professional tax service if you need clarification.
Penalty and interest payments add up quickly if you do not file your taxes correctly. Using the services of a tax professional like Hayes & Associates will be a wise plan if you are not intimately familiar with the new rules surrounding crypto. Any gains you may have realized could quickly be lost if an IRS audit were to occur and your return did not correctly reflect these. You could also leave money on the table if you don’t take advantage of any losses.
Contact us today to calculate your cryptocurrency tax impact.