We take a closer look at how crypto taxation works, and how to account for your crypto profits.
It seems nice and sunny when you’re in the green and making money. Crypto bull runs are known to generate obscene returns. But while you enjoy the fruits, you’ll need to take the responsibility of reporting your returns to the IRS.
Since the crypto industry is nascent and the gains are so complicated, we wanted to give you a few pointers to get you going in the right direction. Please note that even though there are general guidelines that most agree on, nothing is written in stone.
The first step is to classify gains because every crypto income is treated differently. Did you buy a Bitcoin and sell it for profit, or did you trade different cryptocurrencies? Did you mine your coins, or did you receive a coin from a fork? Maybe someone tipped you on Twitter.
Regardless, you’ll need to identify every transaction of how you got each coin, even if you suffered losses. You need to account for each transaction and find the value of that token on that particular date and time.
Cryptocurrencies are not considered currency in the United States, though they are treated as personal property. As such, any increase in their value is treated as a capital gain. You need to report the buying and selling prices and pay a capital gains tax on the profits.
If you incur a loss, it might be deductible against certain capital gains. Whether you trade Fiat-to-Crypto or Crypto-to-Crypto, the same rule applies. Even for Crypto-to-Crypto, you have to account for capital gains based on the price on the day or purchase and sell.
This part is subjective. Taxation differs for hobbyists and for businesses. The good news is that the cost of your mining equipment is deductible.
There are no clear guidelines on who’s a hobbyist and what constitutes a business, but if you’re mining with your old computer in your house, you need not worry.
If you have a complete mining rig and are making consistent profits, you’ll most likely be classified as a business. Also, this applies to all cryptocurrency mining, not just Bitcoin.
When you got free Bitcoin Cash, it’s like a dividend on your holding Bitcoin.
You need to report that as your gain and the price at which Bitcoin Cash traded when you received it on an exchange, or your personal wallet will be considered as the profit.
It doesn’t matter if you sell this Bitcoin Cash or not. This applies for every fork that you have profited from.
Income, Salary, and Commission
If you worked for someone and they paid you in a cryptocurrency, it’s considered your income based on the price of Bitcoin on the day you got paid. Convert that and report that Fiat amount as an income.
If you didn’t sell your Bitcoin that day and your Bitcoin appreciated in value, the remaining amount will be reported as a capital gain. This is similar to if you were simply trading the coin.
If you donate cryptocurrency to an IRS recognised charity, you need not pay any taxes on those gains. Instead, you can deduct the value of the donation based on the market value of the coins on the day of donation.
Many investors and traders believe they need to report their net profit/loss. However, that is not true. You need to report every transaction.
In the US, your capital gains rate depends on how long you have held the asset and your ordinary tax rate as well.
Depending on your time of holding, they may fall under short term gains or long term gains if you held for more than one year. You need to consult a CPA for your individual tax assessment.
The crypto community at large believes that Bitcoin and other cryptocurrency is anonymous, hence if they don’t report their profits, the IRS will never be able to find them. Not only is this legally and morally wrong, but technically, it’s possible to trace Bitcoin transactions through network analysis tools.
Pay your taxes and be free of worries. Also, know how to cash out and save up enough fiat to be able to pay taxes while still having some leftover for yourself. There are various tools like Cointracker that provide basic accounting packages to calculate your tax liability.