Cryptocurrency investing is exciting yet comes with a lot of challenges that discourage individuals from growing. Crypto tax is one of them, and by taxes, we mean a specific amount needed to be paid in case of transactions, trading, profit, and loss. Crypto taxes vary from industry to industry. Hence understanding them is paramount for avoiding huge monetary losses and thus maintaining a healthy investment procedure. Check Bitcoin Motion Official Website to get a piece of detailed information about bitcoin trading.
The Internal Revenue Service (IRS) of the United States federal government still keeps the crypto tax mechanism in progress and is working to further update the scheme for crypto users, both general and potential investors. Trading one currency for another is also a taxable activity; thus, maintaining accurate records is crucial for preserving gains and losses during taxations. What happens if you don’t pay crypto taxes? Delaying taxes payment or not paying them at all could result in high penalties over transactions and trading and thus will cost you even more.
Where Do I Need to Pay Taxes?
Through cryptocurrency, one can perform activities such as trading, transactions, gifting, investing, and more. All come with their own set of rules and regulations. Activities such as trading and transactions are taxable and hence are termed taxable events. While on the other hand, gifting, donating, and transferring cryptocurrencies are not subjected to taxes. Hence are termed as non-taxable events.
Taxable Cryptocurrency Activities
Capital Gains Taxes
- Selling coins for cash: One can owe taxes if they wish to sell digital assets at a rate higher than what you bought them for. In case of loss, the amount may get deducted.
- Conversion of one coin to another: In the case of buying ether from bitcoin, one has to sell their bitcoin first in order to buy a new asset. IRS mentions this activity as a sale; hence is taxable. If sold at a price higher than the purchased rate, taxables become legal here.
- Goods and services: Exchanging cryptocurrencies for a good or service is considered a coin-spending activity by the IRS; hence, transactions become taxable here.
Income Taxes
- Mining: While generating coins, one is liable to owe taxes on the earnings based on the fair market value of the mined coins.
- Getting paid: If one is getting paid in cryptocurrencies, taxes are made on the compensation (income tax bracket).
- Rewards and Incentives: Based on price value, rewards are taxes as they are considered mining proceeds.
Non Taxable Cryptocurrencies Activities
- Buying and holding crypto: Buying assets and holding them is non-taxable, however, taxes are imposed once you sell them.
- Donating: Donating coins to a qualified tax-exempt NGO or charity is non-taxable.
- Gifting: Giving and receiving a gift is unlikely to impose a tax until one gets into staking, which is a taxable activity. One can give up to $15,000 per user in a year without paying taxes.
- Transferring to own wallets: One can transfer crypto in their wallets or accounts without being taxed.
Are Digital Currencies Taxed Like the Stock Market?
Yes, digital assets like cryptocurrency are taxed like stocks or any other form of property. One is required to pay taxes on gain realization and trading of coins. Moreover, these taxes work similarly to capital gains taxes in terms of stocks.
Just like any other investor, a small part of investing consists of gains and losses, which should be reported and taxed at the right time to avoid a huge tax burden on crypto trading.
Minimizing Crypto Taxes
Holding investments for a period of one year or more before using or selling them results in lower taxes as these are long-term gains.
Opening IRA accounts will enable you to make tax-deductible assistance by paying taxes only at funds withdrawal.
In the case of multiple gains and losses on different currencies, one can sell both and utilize the loss to balance out the gains.
Reporting Crypto Taxes
One needs to fill out details of taxes on a form that includes:
- Name of currency
- Acquiring Date
- The date at which the currency was traded, sold, or disposed
- Cost basis
- Total gains
- Total loss
- Sales price
- mining proceeds
- Rewards, incentives.
Summary
Crypto investments bring both gains and losses, however, all are subject to taxes, needed to be paid legally.