In the last few years, cryptocurrencies are on the rise with a sudden surge of prices, which attracted several investors. In the previous year, the value of crypto-coins has reached an all-time high as well as an all-time low. Due to that, there are users who made a hefty sum of profits, while a few users lost a massive sum of investments.
You must pay taxes on your bitcoin and other cryptocurrencies as they are taxable. For tax reasons, the IRS views crypto possessions as “property.” It means that the virtual currency will be taxed similarly to other properties you have, such as gold, stocks, bonds, and more.
Is Crypto An Asset Or A Currency?
Tax authorities have been debating whether cryptocurrencies should be classified as a currency or an asset. The terms cryptocurrency and crypto-assets are often utilized interchangeably. In order to identify crypto as a currency, essential legal support from the government is necessary.
As it does not have any legal assistance, it is better to categorize crypto as an asset or property. Because the tax implications would occur regardless of legality, designating them as assets is a decent method rather than waiting for a government explanation.
In addition to that, the US government has published a statement specifying crypto as a property. It also implies that capital profit taxes will be imposed on the profits of selling crypto coins.
Simple Step By Step Guide To Report Cryptocurrency Profits On Your Tax Return
If you are interested in investing in cryptocurrency, make sure to check out the-cryptogenius-pro.com/pt. It is a leading crypto trading app. Here are brief step-by-step instructions which can help you understand how to report crypto profits on your tax return.
- First of all, collect a record of your every exchange and transaction. Make sure to include 1099 forms exchanges, if delivered to you.
- Then, evaluate the total capital profits and losses.
- Next, complete the IRS Form 8949 for all the crypto events that are taxable as property.
- You have to switch totals from the 8949 form to the 1040 Schedule D Form.
- Make sure to complete the remaining crypto revenue on Form 1040.
Is It Essential To Report Cryptocurrency On Your Taxes?
Yes, you must declare cryptocurrency profits on your taxes if you have engaged with cryptocurrencies. But, a few circumstances of crypto do not come under a taxable event. Keeping that in mind, when filling out your tax forms, it is critical to know what precisely includes under a taxable event.
The IRS has included a question in Form 1040 that asks, “Did you obtain, sell, deliver, exchange, or get financial interest in the virtual currency at any time during this year?” In other words, by including this question on Form 1040, the IRS is implying that taxpayers can not claim that they were unaware of whether to disclose the crypto profits or not.
If your answer is yes to this question, the IRS will check if you have submitted an IRS 8949 form. It is utilized to report stock or property profits and losses. You are likely to be audited if you do not arrange this form.
When Cryptocurrency Profits Are Taxable
It is crucial to understand that bitcoin and other cryptocurrencies are treated as property, similar to equities. It means that you have to record all the capital gains or losses when selling it. The following are the typical crypto-related actions that you must report on the tax return:
- Selling the cryptocurrency for cash
- Exchanging one crypto coin for another virtual currency
- Utilizing cryptocurrency as a payment method at a dealer (it involves the people who use crypto debit cards)
There are some additional circumstances that you may have to account for apart from documenting profits and losses on your tax return. If you got crypto coins as payment, you must declare those transactions as your revenue. Below are some examples:
- Obtaining tokens that have been airdropped as a result of a hard fork
- Crypto staking or mining
- Receiving payment through crypto
Based on how you utilized cryptocurrencies, you may be able to record it as property and revenue. For instance, let’s imagine that you are a gig employee and got the payment in cryptocurrency and you have used it to acquire food at any shop.
Then, you will need to record your crypto revenue on Form 1040 and file IRS Form 8949 for all capital profits or losses when selling the crypto coins to purchase food. It is not uncommon for cryptocurrency traders to report hundreds or thousands of transactions as all the trades or sales come under taxable events.
If you have undergone a capital loss, you have to record all of these operations. In reality, the capital losses can curtail the tax liability and result in a greater refund.
When Cryptocurrency Activities Are Non-Taxable
Let’s look at non-taxable situations as we already know what comes under taxable events in crypto. Here are some examples of crypto events where you do not have to include them on your IRS 8949:
- Switching assets between exchanges on a like-for-like basis
- Purchasing cryptocurrency (not taxed, but does establish your cost-basis)
- Providing cryptocurrency as a gift (it restricts massive gifts that might activate other tax agreements)
- Using cryptocurrency to make a donation
Even though giving crypto coins as gifts and donations are not taxable incidents, you have to include them on the tax return since you may be entitled to the itemized charitable deduction.
As cryptocurrency profits are taxable, it is vital to add them to your tax return if you do not want to face any tax-related issues. Before that, make sure to check which crypto activity is taxable and which activity is non-taxable.
With that, you can have an overview of what to include in your tax return. You can simply follow the simple step-by-step guide we have listed to fill out crypto revenues in the tax return effortlessly.