Cryptocurrency and taxes are two things you won’t like messing up with. First, it will rack your mind, and second, it will rack your mind even more. Many investors get away not paying their crypto taxes, worse, not all investors know that they actually have such obligation. This is where the tug-of-war with the IRS starts.
Let’s admit it. The government still doesn’t know how to tax digital currencies well. But I’m sure of one thing: they want their own cut. And there’s nothing bad about it. As citizens of this country, it’s our responsibility to pay our dues. If you want to start breaking old habits, here are some tips you can make use of paying taxes.
DISCLAIMER: These are just simple guidelines for your crypto taxes and not professional tips. If you wish to learn more, it’s advisable that you contact an IRS agent.
1. IRS treats crypto investments as properties rather than currencies
In 2014, IRS issued the Notice 2014-21 that directs the collection of taxes from cryptocurrencies, not as a currency but a property. The federal government then considers gains and income from cryptos as capital assets just like stocks and bonds.
Since virtual assets like cryptocurrencies are considered property, the government imposes strict record-keeping for investors. This would be crucial in reporting tax returns that consist of gains and transactions.
Many investors think that it’s easy to get away with it. At some point, yes, but we’ll never know when the IRS will come knocking on and off our virtual doors.
2. Cryptocurrency and taxes differ based on short-term and long-term gains
If your gains on your cryptocurrencies are short-term income, you’ll be subjected to ordinary income tax rates. Meanwhile, long-term gains when you withheld the virtual currencies longer than 12 months will be subjected to long-term capital gains tax rates. It could be 15% or 20% depending on your income.
So how will you come up with the right amount? This is where record-keeping comes best. You should keep a transaction record all the time; say you bought stuff from Xbox or storage capacity in WordPress.
The IRS will only know the taxes you need to pay after you told them. But don’t think that you can get away with lying. The platform where you made the transaction can report straight to the IRS or they can file a Suspicious Activity Report. In any way, that means you have no control over what IRS will know. I suggest that you just pay what is due. There are criminal liabilities for taxes you’ll fail to settle.
3. Retirement funds used for crypto investments might not be subject to taxes
There’s actually one way to get rid of crypto taxes. Retirement funds invested on cryptocurrencies aren’t taxable. But you have to be at least 62 years old to do that. If you’re a 22-year old crypto geek, you’ll have to stick to the rules.
Regardless if it’s long-term or short-term gains, retirement accounts are deemed immune from taxes. Investors who have this account are not required to pay transaction taxes either. This is where cryptocurrency and taxes separate.
However, there are consequences when retirement accounts would be liable to taxes. Once the retirement account practices distribution, gains might be subjected to federal dues. Another thing would be mining that result in trading.
4. Goods or services bought using cryptos are considered as capital sales
Like what we said earlier, cryptocurrencies are capital properties.So whatever goods or services bought using virtual currencies will be deemed capital sales. Also, if the cryptos, Bitcoin, for example, gained value before spending it, you’ll have pay taxes as a gain. With that, gain taxes are acquired not just through trading or selling, but also during price fluctuations.
This is one of the typical taxes the government collects and it’s just right to say that this is unavoidable.
5. Though the government set rules, tax law for cryptos are vague
Though IRS set the rules, taxation in cryptocurrencies is still as murky as the Ohio River. Only 802 tax returns in 2016 reported cryptocurrency gains in 2016. That is a minuscule amount compared to the millions of Bitcoin users in the United States.
But the federal is keen on having more tax returns. They had summoned CoinBase to submit reports of their users’ transaction records. It’s hard to tax all these people, but with the growing attention to cryptocurrency and taxes, even overseas transactions are not off the hook.
CoinBase is just the start. I strongly predict that there will be more federal crackdowns on exchange platforms anytime soon.
6. Aside from sale, trading cryptos are also taxable
Once you trade a cryptocurrency unit, say Bitcoin, you’re required to submit a capital gains report to the IRS. Regardless if you earned or lost money over a trade, you have to report either a loss tax treatment or capital sales tax.
This applies to trades that happen both in exchange platforms and direct trade. Gains or losses are realized the moment you settled a trade. As the IRS requires, you have to file the report after a gain or loss is realized.
To make it easier for you, report each transaction using Form 8949. IRS might not accept summary reports so you have to file all transactions one by one.
7. Cryptos paid to employees are taxable to the employees
Employers who pay their employees with cryptocurrencies will have a different tax setup. The employee would be taxed for it and the employer would have to submit the report to IRS. If the income from mining or trading isn’t done as an employee, it would fall under the self-employment tax.
Once the person earned the gains from cryptos, he has to convert it to dollars the day the gains are realized. He must include it his tax returns. It’s important to determine if a person is employed or self-employed. There are “allowable tax deductions for those self-employed individuals engaged in cryptocurrency and taxes.
Whatever employment status you are in, you should keep in mind that there’s no exception in paying crypto taxes. Don’t wait until the IRS take notice of your failure to settle tax dues.
8. You just can’t avoid taxes in using cryptos
Aside from retirement accounts, you can avoid paying taxes if you just keep your cryptos in the safe. But as an investor, this wouldn’t be the case. Any movement associated with your virtual properties will be monitored and checked against taxation laws.
The IRS is just starting to establish stricter rules to go after crypto tax evaders. The Notice 2014-21 is already a sign that cryptocurrency is under the radar of the federal government. Do yourself a big favor of paying taxes. You can contact an IRS agent directly for assistance.
Be it for beginners or veteran investors, there’s nothing more worthwhile than trading and speculating cryptos with full freedom.
Cryptocurrency and taxes are your choice of poison that happens to come together. But if you can mine Bitcoins, I’m sure that figuring out taxes will be a piece of cake for you. Just remember that these points we included here are just guidelines based on our interpretations. I highly advise that you contact a tax expert to guide you completely with your tax woes.
What do you think of these points? Let us know in the comment section!