In recent years, you may have heard the term cryptocurrency being thrown around in everyday conversation. You may even dabble in cryptocurrencies yourself. While this new decentralized, digital store of value and medium of exchange is all the rage, it also leaves many individuals wondering what to do come tax season.
Whether you have Bitcoin of your own, or you have another form of cryptocurrencies such as Litecoin, Ripple, or Dogecoin, you must understand how it is taxed, so you don’t have the Internal Revenue Service knocking at your door for owed taxes. Cryptocurrencies that are bought, sold, or mined are all taxable, which means you need to report this income on your tax return.
To ensure you understand all tax obligations for cryptocurrency, the team at AA Tax & Accounting Services has put together a quick guide so you can confidently file your tax return by the new deadline of May 17.
When to pay taxes on cryptocurrency
When determining if you need to pay taxes on any cryptocurrency, you need to take stock of any taxable events you’ve encountered over the past year. These taxable events typically occur upon the sale or trade of crypto — meaning that you won’t owe taxes simply for buying or holding onto cryptocurrency, but only if a sale or transaction takes place.
You may be liable for cryptocurrency taxes if you made any of the following transaction during the previous tax year:
- Traded crypto to fiat currency
- Traded cryptocurrency to virtual currency
- Received cryptocurrency as the result of a fork
- Received crypto as compensation for goods or services
With any of these transactions, you need to consider capital gains and capital losses on your crypto. If any of these transactions resulted in a profit gain, that income is taxable and needs to be reported. However, if you incurred a loss from the transaction, you can write off the loss when filing this year’s tax return.
Although you may have received cryptocurrency as a gift, this crypto exchange will not incur taxes unless it is higher than the gift exemption amount. To ensure you avoid dealing with tax penalties, it’s important that you accurately calculate any gains and losses on any crypto transactions that have taken place. Without accurate record-keeping, you’re putting yourself at risk of an IRS penalty.
How much do I owe on my cryptocurrency?
Every person’s taxes are different, which is why there isn’t a solid answer we can give you regarding how much you will owe after using cryptocurrency. The primary consideration for how much you will owe depends on how long you have held onto your cryptocurrency and whether you earned a profit or experienced a loss.
Your tax rate is determined by how long you’ve had your cryptocurrency. For instance, if you have had Dogecoin for more than one year, you will be required to pay a long-term capital gains tax rate on any profits you make from a sale. But if you’ve had your Dogecoin for only a few months, your profits will be taxed at your standard income tax rate.
Any profits you earn from the sale of cryptocurrency are taxable income and must be reported to the IRS. However, not all sales result in profits. If you experience any losses related to your cryptocurrency, you have the option to reduce your taxable income by a maximum of $3,000, and those losses can be carried over to future years.
Tax consulting services in Cedar City, Utah
Determining exactly how much you owe on your crypto transactions can be overwhelming. If you aren’t sure where to start, AA Tax & Accounting Services’ tax consultants can walk you through the process with our tax consulting services.
The AA Tax & Accounting Services team can help you execute the right cryptocurrency tax strategies to save you money. Contact us to schedule an appointment.
