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The advent of the technological age has introduced innovations that help improve people’s way of life. It also helped many industries to advance, one of which is the financial industry. More people now use e-wallets and online banking apps. Aside from this, a new currency has been created, the cryptocurrency or digital currency.
Although cryptocurrency has been lauded for its anonymity and decentralized network, it is still considered taxable by the government as an individual’s “property” or capital asset.
There are numerous reasons why digital currencies must be taxed. For one, the rise of cryptocurrency plays a part in the widening tax gap in the U.S. About a trillion dollars is lost to unpaid taxes every year. On top of that, cryptocurrencies may have aided money launderers and criminals in their illegal activities.
What You Need to Know About Digital Currency Taxes
As a cryptocurrency investor, taxes may be giving you a hard time. However, knowing a few important things can help you easily navigate through the tax season.
When Does It Become Taxable?
Trading With Digital Currencies
The IRS has clarified which transactions are taxable when using digital currencies. For instance, trading and exchanging cryptocurrencies for another one, such as Bitcoin for Ethereum and vice-versa, is considered a taxable event by the IRS.
When exchanging crypto for fiat money or legal tender, you can also be taxed. However, you cannot be taxed when you buy into cryptocurrency or digital currencies using fiat money.
Buying Goods And Services With Digital Currencies
Availing services or purchasing goods with blockchain as payment is taxable. More and more companies have started to accept cryptocurrency as payment, making people see these digital currencies as viable alternatives to fiat money.
However, this action counts as you selling cryptocurrency. Therefore, you can still be taxed on top of the other applicable sales taxes.
What Are The Essentials When Reporting Cryptocurrency Taxes To The Irs?
Track Your Cryptocurrency Transactions
With the annual changes in tax policies, keeping a record of all your transactions is necessary. When getting into cryptocurrency, it is your responsibility to keep track of all potential taxable transactions as early as possible. This includes everything from the original price of your cryptocurrency and length of possession to how much you sold it.
Except for when you bought it with fiat money, you still need to report how you obtained your crypto to the IRS. Most crypto exchanges provide a copy of all your transactions to you and the IRS through the 1099-B form. However, it may not contain your crypto’s original value or cost basis, which can significantly affect how much tax you have to pay.
Track all your cryptocurrency transactions will help you see how much you owe the government, especially if you use digital currencies for everyday transactions. It’s important to keep your books up-to-date.
Compute For Your Long- And Short-term Gains And Losses
Since cryptocurrency is considered a “property” or capital asset, its corresponding tax will be in that category. However, this is where the length of cryptocurrency possession comes into play, as this will have a big part in indicating how much tax you’ll have to pay.
Cryptocurrencies are considered short-term gains and categorized as ordinary income if you have had them for less than 12 months. Meanwhile, having them for more than 12 months will turn them into long-term gains and be taxed based on the capital gains tax rates.
For this, you’ll need to know two things: your digital currencies’ cost basis and their appreciated value. The cost basis is the original price for which you bought it, and the appreciated value is the current price for which you sold it.
Generally, tax rates for long-term capital gains are lower than the short-term. Because of this, most people sell their cryptocurrencies when they’ve had them for more than a year, as they’ll pay for lower taxes.
Take a Proactive Approach to Your Cryptocurrency Taxes
With the changes in filing cryptocurrency taxes, you may have a difficult time, especially if you are unaware of what needs to be done. Therefore, it’s essential to have your books up-to-date and diligently keep track of all your cryptocurrency transactions.
Lastly, consult with trusted financial advisors to avoid unintentionally dodging your cryptocurrency taxes if you’re in doubt.
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