Before you know how to report crypto taxes, it is important to understand what cryptocurrencies and crypto taxes are. There is no chance you wouldn’t have heard the term cryptocurrency before as it gained a lot of popularity and adoration from a lot of people in recent years. This because of its decentralized nature which means that it is not under the control of any outside authority or the government.
What Are Crypto Currencies?
A cryptocurrency is a form of payment, which can be traded for goods and services online. Many companies have provided their own currencies, also referred to as tokens, and these can be exchanged directly for the good or service the business provides. Cryptocurrencies work using blockchain technology. Blockchain is a decentralized system that handles and records transactions across many computers. Part of that technology’s appeal is its protection.
There are many types of cryptocurrencies such as
- Bitcoin (BTC)
- Ethereum (ETH)
- Ripple (XRP)
- Bitcoin cash
- Ethereum classic
- Litecoin (LTC)
- Stellar Lumen (XLM)
- Zcash (ZEC)
Knowing how to report crypto taxes requires knowledge of how the government views cryptocurrencies. Cryptocurrencies like Bitcoin and Ethereum, in the United States, are viewed as a property and not as a form of currency, also is regarded as capital under federal tax law. This means that the same tax principles which apply to property transactions also apply to cryptocurrencies trading or disposal. It is widely known that property transaction are subjected to capital gains tax and so are cryptocurrencies and they are required to be reported on Form 8949. A capital gain tax can occur when you carry out any of the following transactions mentioned below
- Selling your cryptocurrency for fiat currency, like the USD
- Trading cryptocurrencies for other cryptocurrencies
- Using cryptocurrency to pay for various services and goods.
The following transactions will not result in capital tax gains
- Lending your coins
- Donation of cryptocurrencies to non-profit organizations
- Transferring cryptocurrencies between your own wallets
- Purchasing cryptocurrency with fiat money like ESD/Euros.
To understand how to report crypto taxes, you should know for how long you’ve held your assets as they will help you determine the tax amount you are required to pay.
Short-term capital gains
Crypto traders who sell their cryptocurrency sold within one year of acquisition are subjected to short-term capital gains tax. Short-term capital gains are applied for tax purposes and are subject to the ordinary income tax rates.
Long-term capital gains
Crypto traders who sell their cryptocurrencies after one year from the date of purchase are subjected to a tax on long-term capital gains of 0%, 15% or 20% depending on the reporting status and the taxable income.
What Does the IRS Have To Say?
Over 10,000 letters were sent by the Internal Revenue Service (IRS) in July 2019 to crypto traders who failed to report crypto taxes, where they were told that they had to report them and file amended reports. Failure to do so would lead to fines and, possibly, jail. In some extreme cases, you are highly likely to face prison time and pay up to a staggering $250,000 fine. Despite the stringent penalties that the IRS aims to implement, it is recommended that if you haven’t done so yet, you learn how to pay taxes.
Also See: How to Earn Free Bitcoin
How To Report Cryptotaxes?
“How to report crypto taxes?” is a question asked by many confused individuals. In order to accurately file and report crypto transactions, crypto traders are required to have the posses the 1040 schedule D and the IRS form 8949.
Make sure all of your cryptocurrency transactions are listed on Form 8949 along with the date you purchased the crypto, the date you sold or exchanged the crypto, your proceeds or fair market value, your cost base and your benefit or loss.
Once each trade has been listed, sum them up and pass the number to your Schedule D 1040 form. Be sure to include both these forms in your annual tax return. Nevertheless, this proves to be too cumbersome a method to follow, which is why you will benefit greatly from crypto-tax software.
The Best Crypto Tax Software In The Market?
What if you don’t know how to report crypto taxes or if you are confused or maybe bad at calculations. There are a lot of tools that can help crypto traders such as yourself calculate taxes accurately. Online tools like crypto tax software are available on the internet and they have proved to be of great help crypto traders all over the world. Apart from helping crypto traders calculate help also help in ensuring that all this is being done while following legal guidelines.
Listed below are some of the best crypto tax software in the market that can be of help if you don’t know how to report crypto taxes
Accointing allows you to track your crypto portfolio while recording all your transactions in order for you to print a tax report at any given point of time. It exports your trades in the proper format for taxes in the USA, Switzerland, Germany, Austria, and the United Kingdom.
Blox is an app that shares data across all wallets and synchronizes it to provide you with a real-time view of your assets. It represents accountants, merchants, miners, funds, and VCs.
CoinTracking provides you with an update on real-time trading, changes in coin value, tax reports and more. CoinTracking is also considered one of the leading applications for crypto-currency accounting.
CoinTracker has collaborated with Coinbase and TurboTax to provide a robust tax reporting program that syncs all accounts and wallets, not to be confused with CoinTracking above.