Can The Government Tax Cryptocurrency

Calculate Gains And Losses With Crypto Tax Software

The easiest way to calculate your capital gains and losses is using crypto tax software. Crypto tax software is integrated with major crypto exchanges, blockchains, and wallets, and can help you with reporting and filing your crypto taxes.

At ZenLedger, you can use our crypto tax calculation software to simplify tax reporting and financial analysis in compliance with the IRS and the SEC rules and regulations.

How To Stay Out Of Trouble With The Irs

As cryptocurrency becomes more and more mainstream and tracking tools become more adept at flagging crypto buys, sells, and trades bitcoin gains will likely become more heavily scrutinized by the IRS. Along with the rise of cryptocurrency has come the rise of financial pros who have mastered the ins and outs of crypto and bitcoin taxes, as well as how to handle various crypto movements in the market, like airdrops, where new forms of cryptocurrencies are given to current investors.

The more you consider how you use crypto, the more questions you may have about how your crypto will be taxed. For example, can you donate crypto to charity? Right now, the answer is yes, with crypto being considered property similar to gifting stock or real estate in the eyes of the IRS. If you are planning to donate crypto to charity, it may make sense to donate the cryptocurrency directly to the charity so the charity can receive the full cash value of your crypto gift.

While you can write off the value of your crypto gift on your taxes, you will still be responsible for any capital gains taxes on the money you gave. But if you give the crypto directly to a 501 charity while still in crypto form, the 501 charity will be exempt from capital gains taxes when the crypto is converted to cash, maximizing the effectiveness of your gift.

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Bitcoin Miners Must Report Receipt Of The Virtual Currency As Income

Some people “mine” Bitcoin by using computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger.

According to the IRS, when a taxpayer successfully mines Bitcoin and has earnings from that activity whether in the form of Bitcoin or any other form, he or she must include it in his gross income after determining the fair market dollar value of the virtual currency as of the day you received it. If a bitcoin miner is self-employed, his or her gross earnings minus allowable tax deductions are also subject to the self-employment tax.

Whether you have stock, bonds, ETFs, cryptocurrency, rental property income or other investments, TurboTax Premier has you covered. Increase your tax knowledge and understanding all while doing your taxes.

You May Have A Hard Time Exchanging Your Digital Currency

Digital currencies can be difficult to buy and use. You may not be able to exchange them easily for cash or to purchase goods and services.

Merchants don’t have to accept digital currencies as payment. They don’t have to exchange digital currencies for traditional currencies, such as the Canadian dollar.

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Other Ways To Obtain Cryptocurrency

There are other ways to obtain virtual currency beyond simply buying it. For instance, you can earn cryptocurrency by mining it. You can also receive it as a promotion for goods or services, for free from cryptocurrency platforms, or for staking cryptocurrency. This latter activity allows you to earn interest by purchasing and setting aside your tokens to become an active validating node for a crypto network. In these situations, you owe tax on the entire value of the crypto on the day received and it counts as ordinary income.

Bitcoin Undermines The Cycle Of Trust

Bitcoins decentralized system has the potential to dismantle the system described above. Its network does away with intermediaries and, by extension, the elements of a governments system.

A central bank is no longer required because Bitcoin, the currency, can be produced by anyone running a full node. Peer-to-peer transfers between two parties on Bitcoins network means that intermediaries are no longer required to manage and distribute currency.

The chain of trust underpinning the current financial infrastructure becomes an algorithmic construct in Bitcoins network. A transaction is not included in the central ledger unless it is approved by all full nodes. Even a single disagreement or error in a transaction entry can result in its rejection.

Theoretically, at least, the streamlining of operations between individuals and between various actors on Bitcoins blockchain can rearrange the current system. The financial infrastructure is decentralized and the power to increase or decrease currency supply is not appointed with a single or group of authorities. Thus, in the new setup, the role of governments in managing and regulating economic policy through intermediaries may become superfluous.

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Hold Cryptocurrency For The Long

If you hold a crypto investment for at least one year before selling, your gains qualify for the preferential long-term capital gains rate. Depending on your taxable income for the year, this can almost halve your tax rate, going from a maximum rate of 37% for short-term gains to a maximum rate of just 20% for long-term gains.

Is Crypto Taxed Like Stocks

Crypto is taxed like stocks and other types of property. When you realize a gain after selling or disposing of crypto, you’re required to pay taxes on the amount of the gain. The tax rates for crypto gains are the same as capital gains taxes for stocks.

Part of investing in crypto is recording your gains and losses, accurately reporting them, and paying your taxes. Like every investor, you want to keep this tax burden to a minimum. In closing, let’s look at a few effective ways to minimize crypto taxes:

• Hold successful crypto investments for more than one year before selling or using them. Tax rates on these long-term gains are lower than rates on short-term gains.
• Use tax loss harvesting. If you’ve had gains and losses on different types of cryptocurrency, you can sell both and use the losers to offset your gains.
• Consider opening a crypto IRA. Like other IRAs, this type of account lets you make tax-deductible contributions and only pay taxes when you withdraw funds.

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If Your Bitcoin Is Stolen Tough

Being robbed is bad enough, and previously if youd been swindled of your bitcoins, you might have been able to deduct it as a theft loss on your taxes. However, the new tax rules do away with the deduction for personal theft losses.

Another tax rule doesnt look favorable for owners of digital currency, either. The IRS allows owners to trade many kinds of property for a similar kind of property without immediately incurring a tax liability its called a like-kind exchange.

Before the tax law changes, bitcoin owners wanted to know whether they could engage in like-kind transactions with other cryptocurrencies. The answer was unclear, Harris says. What was unclear was whether one crypto was like-kind to another. Now the new tax reform has limited like-kind exchanges to real property, not personal goods.

Do I Have To Pay Taxes If I Am A Bitcoin Miner

Yes. Cryptocurrency mining is considered a taxable event. The fair market value or cost basis of the coin is its price at the time at which you mined it. The good news is that you can make business deductions for equipment and resources used in mining. The nature of those deductions differs based on whether you mined the cryptocurrencies for personal or individual gain. If you run a mining business, then you can make the deductions to cut down your tax bill. But you cannot make these deductions if you mined the cryptocurrencies for personal benefit.

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Reporting Cryptocurrency On Your Taxes

Letâs get to the final step of understanding US crypto taxes by learning how to report cryptocurrency taxes.

It is easy to get confused as to which IRS tax form is required for what purpose. As we already know crypto investing leads to the generation of capital gains taxes, and activities like mining, staking, and rewards collection will lead to income taxes.

Most important tax forms in the United States:

What Happens If You Dont Report Your Crypto Taxes

Intentionally not reporting your cryptocurrency gains, losses, and income on your taxes is considered tax fraud by the IRS.

The IRS can enforce a number of penalties for tax fraud, including criminal prosecution, five years in prison, along with a fine of up to $250,000.

Over the past two years, the IRS has aggressively been cracking down on cryptocurrency tax compliance. The agency has sent tens of thousands of warning and action letters to Coinbase users suspected of inaccurate tax reporting. It has also to include a question that every US taxpayer must answer under penalty of perjury:

âAt any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?â

With this much scrutiny on the cryptocurrency asset class, itâs likely that we will see audits and criminal tax prosecutions continue to increase as cryptocurrency and bitcoin adoption accelerates.

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Do You Pay Taxes For Holding Cryptocurrency

If you simply buy Bitcoin or another cryptocurrency and hold it in a wallet, you do not have any sort of tax reporting requirement as you havenât realized a gain or loss on your investment yet.

Once you sell, trade, or trigger a taxable event by disposing of the coin, this is when you realize a capital gain or loss.

Capital Gain & Loss On Crypto

A capital gain or loss is incurred on trading or selling cryptocurrency. Just like traditional assets, capital gains will be incurred when the price of selling is greater than the price it has been acquired for . On the other hand, a capital loss is incurred when the price of selling is lesser than the price it was acquired for.

Before selling a capital asset, you must figure out if the investment was short-term or long-term. Long-term gains and losses are incurred when the assets were held for more than a year, whereas short-term capital gains and losses are incurred when the assets have been held for less than one year.

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Is The United States Looking To Ban Crypto Like China

China recently renewed its regulation of cryptocurrencies and banned companies from doing cryptocurrency business.

Indeed, regulation of cryptocurrencies is a frequent topic for US lawmakers and government agencies. Some states have sought to promote blockchain technology by enacting favorable regulations that exempt cryptocurrencies from state securities laws and money transfer laws. At this point, however, the growth of cryptocurrency markets and exchanges hasoutstripped government’s ability to enforce existing regulations.

Exchanged For Other Cryptocurrencies

Taxpayers who make coin-to-coin trades may mistakenly assume there is no tax liability because they did not receive any actual funds. Given the IRSs treatment of cryptocurrency as property, however, cryptocurrency trades are subject to the same capital gains and losses rules as all other property exchanges.

Some taxpayers and preparers have attempted to delay capital gains income on cryptocurrency-to-cryptocurrency trades by classifying the trades as Internal Revenue Code section 1031 like-kind exchanges, whereby they can defer income to the replacement positions cost basis. Prior to the Tax Cuts and Jobs Act of 2017 , it was possible to argue that cryptocurrency could qualify, but there were inherent problems in the applicability of IRC section 1031 to these trades, since they may have failed to meet certain requirements. For example, the currencies are not necessarily like-kind properties. In addition, reporting such trades under IRC section 1031 must be done properly, using Form 8824 and listing every trade. The TCJA made this debate moot by limiting 1031 like-kind exchanges to real property, not for sale starting with tax year 2018, therefore, this treatment of cryptocurrencies will no longer be even theoretically viable.

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Bitcoins Held As Capital Assets Are Taxed As Property

If Bitcoin is held as a capital asset, you must treat them as property for tax purposes. General tax principles applicable to property transactions apply. Like stocks or bonds, any gain or loss from the sale or exchange of the asset is taxed as a capital gain or loss. Otherwise, the investor realizes ordinary gain or loss on an exchange.

Capital Gain Tax Events

Here are the short-term capital gain and long-term capital cryptocurrency gain tax events in which the cryptocurrency tax rates as of 2021 apply:

For example, you buy 2 ETH for $1,000 and then sell them for $700 a few months later. The capital loss of $300 will get deducted and reduce your taxable income.

For example, you bought 5 bitcoins in a bitcoin transaction for $150 each pre-2014. Now thanks to your newfound wealth, you use 1 bitcoin to buy a brand new Harley-Davidson for $56,000. At the time of buying the bike, 1 bitcoin is worth $56,000.

In this example, you incur a taxable event when you dispose of your bitcoin for the Harley-Davidson . As a result, you incur a capital gain of $55,850 and need to report it on your taxes.

This can be done either directly peer-to-peer or on an exchange.

Here is an example: you bought 10 Litecoin for $500. After a few months, you traded all of your Litecoin for 1 ETH . When you made the trade, 10 Litecoin were worth $3,000.

Here, you incurred a capital gain of $2,500 from trading your Litecoin for Ethereum and will thus need to report it on your taxes.

Its important to note that if you were just transferring an asset from one exchange or wallet to another, that is not a taxable event as it does not trigger any capital gains or losses.

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Capital Assets And Cryptocurrency

If you sell your home because youre moving or sell some stocks because you want to take your profit, these properties are considered capital assets. Its similar for virtual currencies. You pay capital gains taxes on themeither short or long termon your Schedule D. These are calculated just like other capital gains and losses: You take your cost basis and calculate how much its gone up or down since that date. Capital gains rates for the 2020 tax year can be 0, 15, or 20 percent, depending on your taxable income.

If youre selling property as a part of a business or trade, however, the property is not considered a capital asset and is taxed as ordinary income. This applies to virtual currency sales, too. The IRS looks at the character of the gain or lossyour intent, or why youre selling.

The IRS has made a lot of information about virtual currency and taxes available online. To dig deeper, visit this page of FAQs or read IRS Notice 2014-21.

How Is The Irs Handling Cryptocurrency On 2021 Taxes

As it has been doing since 2019, the IRS will ask about your cryptocurrency for your taxes. This year the 1040 US Individual Income Tax Return form features a question about crypto: “At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?” And though the IRS is technically asking about receiving cryptocurrency as well, it’s actually pretty focused on whether you unloaded it by selling or trading it.

“If you’re just purchasing cryptocurrency with US dollars, and that’s all you do during the year — you don’t sell it, you don’t exchange it, you just keep it in your wallet for the whole year — you can check ‘no’ on that question,” says Hunley.

The IRS updated the FAQ page on digital currencies to underline this point, as well, in the answer to a question about 2020 taxes: “If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question.”

For now, the IRS regards bitcoin and other cryptocurrencies like property. So, if you bought bitcoin and held it all, you don’t need to get into it on your tax return.

“The bottom line is that the IRS is looking for taxable transactions. So if you have a taxable transaction, you should be checking ‘yes.’ If you have a nontaxable transaction, you’re checking ‘no,'” said Hunley.

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