Cryptocurrencies are taxable. The IRS classifies cryptocurrency holdings as property for tax purposes, meaning it is taxed similarly to other assets, like stocks. If you own cryptocurrency, ensuring you are properly tracking your gains and losses is essential to avoiding an audit from the IRS. However, The complex and ever-evolving nature of digital currencies can make proper reporting complicated. Here are some important things to know about reporting cryptocurrency to the IRS and how to plan ahead for your taxes.
Do I Owe Taxes on Cryptocurrency I Purchased?
The simple act of buying cryptocurrency and keeping it within the platform where you purchased it or transferring it to your personal wallet is not taxable, meaning you won’t owe taxes on them at the end of the year.
Are Cryptocurrency Exchanges and Sales Taxable?
When you start to exchange your digital currencies or use them as a payment method, they become taxable. Actions like selling your crypto for U.S dollars, exchanging one digital currency for another, or buying one cryptocurrency currency with another are all examples of taxable transactions. Essentially, whenever you sell or exchange your crypto for another “investment”, it becomes a taxable transaction. This means people who do a lot of trading must be extra diligent about tracking their transactions, as every time you place a trade, it’s a taxable event.
Is Paying for Something at a Retailer That Accepts Digital Currencies Taxable?
The IRS views spending your digital currencies in the same way as selling them. For instance, let’s say you bought Bitcoin for $1,000 and the value increased to $20,000. If you use your Bitcoin to buy a new car, you’ll have to pay capital gains tax on that transaction. The IRS will look at the value of the coin on the day you bought the car and compare that to the value on the date on which it was acquired. If you make less than $40,000 a year, you’ll have to pay taxes on any item purchased with a digital currency that increased in value.
Reporting and Paying Taxes on Cryptocurrency
Since the IRS classified digital currencies as property, their taxable value is subject to capital gains or losses. This means the taxes you pay on virtual currencies will depend on how much value they gained or lost in the fiscal year. The difference between how much you bought and sold the crypto for and the amount you earn from its sale (the capital gain or loss) is what you’ll report on your tax return. For example, if you bought $300 worth of Ethereum and sold it for $1,000, you’d report and pay taxes on a gain of $700.
The capital tax gains rate you’ll be subject to will depend on your earnings from the sale along with how long you held the currency before selling. For example, if you held your digital currencies for multiple years before selling, they’d be subject to a long-term capital gains tax rate. To outline your cryptocurrency earnings or losses, you can use Form 8949 and then report them on Form 1040 using Schedule D.
Consult a Skilled Tax Resolution Attorney
If you own, sell, or exchange virtual currency, the best way to avoid getting audited or other issues with the IRS is to consult with an experienced tax attorney. At Morgan Sebastian Law, attorney Becky Sebastian is eager to help you navigate the complexities of your tax situation. She understands that accurately reporting capital gains tax on your digital currencies can be a challenge, and can help you properly report gains (or losses) to avoid an audit.