Since the past few years, cryptocurrency has gained huge popularity among investors and the large corporate sectors. Two major uses of cryptocurrency are that it is used as a mode of payment for commodities and it can also be used as a tool of exchange. The coins can be interchanged for established currency. The IRS has declared cryptocurrency to be property since the year 2014. Many investors plan not to pay tax, if the IRS agency ever gets a hold of such people, then they will be highly penalized for their deeds.
- The only tax preparation site is the TurboTax website that explains to an investor all the process of recording a cryptocurrency sale.
- For cryptocurrencies like Ethereum or ETH and Bitcoin, capital gain tax is applied. The IRS or Internal Revenue Service treats all type of cryptocurrency as capital assets and taxes are applied on them when they are sold as profit.
- The cryptocurrency tax bill is based on the duration of the time in which the currency was held and the overall annual income of the person.
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- Seven things that one must know about cryptocurrency taxes are discussed below:
- All the cryptocurrency trades and cryptocurrency sales are taxable – Investors have to announce their gains and losses on all separate trades to the IRS agent. Specifically interchanging a cryptocurrency for another one, transforming it back to USD or even spending the cryptocurrency are chargeable events.
- The IRS is progressively concentrated on the crypto taxes – The question may come across your mind that what would happen if you don’t pay the crypto tax? Just like all other tax fraud cases, ignoring cryptocurrency taxes can lead to a sentence of five years in jail or sometimes a maximum fine of $250,000. In between 2013 and 2015, fewer than 900 investors filed the cryptocurrency taxes per annum. The focus of the IRS agency has increasingly moved towards cryptocurrency taxes. After a court case, Coinbase has to announce information about investors who have replaced over $20,000 to the IRS agent.
- The two major types of cryptocurrency taxes – As per the IRS’ Guidance on virtual currencies, cryptocurrency is announced as a property and not currency. This further means one has to capital profit taxes. The two most important types of Capital gain taxes are the long term and the short term. The long term signifies that you have to possess a currency over a year before selling it. Short time taxes apply to the cryptocurrency you have had for less than a year. The cryptocurrency income taxes are classified into the similar seven IRS tax brackets that range from 10% to 37%.
- The crypto tax generally needs two different tax structures. Generally, they use sales and other constitution of Capital Assets Form 8949 to give a record on digital business. In this part, the investors explain the assets that they have traded which include the dates they obtained them and sold them, the amount that they have gained, the price of doing the trade and the total profit or loss made. This form differentiates between short term and long-term capital profits and loss. The form that troubles crypto traders is form 1040 schedule D, this type covers the short term as well as long-term profits and loss going off data from form 8949.
- It is a compulsion that the cryptocurrency miners will have to pay tax – cryptocurrency miners have to spend taxes on their earnings mandatorily which also means that their cryptocurrency is subjected to income taxes. Also, mining is said to be self-employment which further requires a self-employment tax is almost 15.3%.
- Everything crypto-related is not taxed – the investors are not just taxed for selling or purchasing cryptocurrency. One needs to sell or purchase to be subjected to any tax.
- The cryptocurrency tokens are possibly tax-exempt – notably, there is a theory that the cryptocurrency tokens which represents a service are not subjected to any federal tax laws.
Trading cryptocurrency is not an easy job, there are different types of tax schemes that one should be aware of before trading them. Not paying the appropriate amount is an offensive issue and it can lead one to prison.