Top 3 Tax No-Nos when selling Crypto

In layman’s terms, cryptocurrencies are digital currencies that can be used to buy goods and services in the same way that other currencies can. However, it has been primarily controversial since its inception due to its decentralized nature, which means it operates without the use of any intermediaries such as banks, financial organizations, or central agencies. In today’s digital currency world, more than 1,500 virtual currencies are traded, including Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, Matic, and others. Since the nationwide ban, the amount of money invested in and traded in cryptocurrencies has surged by a factor of ten.

In the United States, how are digital currencies taxed?

The IRS published a notice in 2014 clarifying that virtual currency is recognized as property for tax reasons, that cryptocurrency is taxed as a capital asset, and that every taxable event must be recorded in IRS Form 8949, which is the cryptocurrency tax form. The IRS then began asking individuals about their virtual currency activities on their tax returns beginning in 2019, making it impossible for people to argue that they were ignorant that bitcoin transactions were required to be reported. The IRS may apply penalties if a person fails to submit cryptocurrency taxes due to the nature of the transactions.

Also, capital gains tax may be incurred while selling or investing in cryptocurrency. However, the IRS makes a distinction between short-term and long-term gains when it comes to death taxes. Losses can be influencing gains, just like any other asset investment. If the person who made the transaction gained from the difference between the price of the goods or service and the purchase price of the used cryptocurrency, the transaction creates capital gains.

Taxes on cryptocurrency: What You Should Know?

  1. Simply using cryptocurrency exposes you to the risk of being taxed

You may incur a tax penalty if you trade virtual currency for real currency, products, or services. If the price you realize for your cryptocurrency – the value of the good or actual currency you receive – is higher than your cost basis in the cryptocurrency, you’ll generate a liability. So, if the cryptocurrency gains more value than you put into it, you’ve got a tax liability on your hands.

You could have a tax loss if the value of products, services, or actual currency is less than your bitcoin cost basis. To make the computation in any instance, you’ll need to know your cost basis. This isn’t a transaction tax, so keep that in mind. It’s a capital gains tax or a tax on the cryptocurrency’s recognized change in value. You haven’t realized a gain or loss if you don’t trade the cryptocurrency for something else, just like you haven’t realized a gain or loss if you don’t exchange the cryptocurrency for something else, just like you haven’t realized a gain or loss if you don’t exchange the cryptocurrency for.

  1. Crypto miners may be handled differently than the general public

Crypto assets earned through mining or received as a promotion or payment for goods or services will be included in your regular taxable income. At your ordinary income tax rate, you must pay tax on the entire fair market value of the cryptocurrency on the day it is received.

The value of what you produce determines your revenue. When you mine cryptocurrencies, you earn money at fair market value, which is your coin’s basis. Your expenses may be deductible if this is a trade or enterprise. But it’s the last part that’s important: To be eligible, you must own or operate a trade or business. You can’t run your mining equipment as a hobby and get the same tax benefits as if it were a real business.

  1. Received Crypto Assets as Payments in Business Transactions

According to US law, any products or services acquired with crypto assets are considered to be exchanges of crypto assets for goods or services. If the value of the asset exceeds the price paid for it, the taxpayer must pay capital gains tax.

Additionally, if a crypto asset is received as payment for a commercial transaction, the fair market value on the day and time of receipt should be recognized as income and taxable at standard taxi rates.

How to Prepare for the Crypto Tax in the United States

Getting your crypto taxes ready and filed can be a time-consuming procedure, especially if you’ve never done it before. The first stage in the filing procedure is to gather all of your crypto activity, which is both important and time-consuming.

For some, logging one or two trades may be sufficient. It can be a daunting task for more experienced investors who have dabbled in NFTs, yield farming, airdrops, and other forms of crypto trading. That’s why, to avoid having to handle everything at once, it’s usually best to keep track of your trades as you go during the tax year.

After you’ve accomplished the first stage, you’ll need to figure out whether you’ve made any capital gains or losses. Several systems can handle this for you, some of which provide free trials and may have everything you need to finish the next stage.

Then fill out Form 8949 and attach it to Form Schedule D. Any crypto assets earned as income must be reported on Schedule 1 of Form 1040, and self-employed crypto earnings must be reported on Schedule C. Finally, submit your documents and pay any tax you owe before the deadline.

Conclusion

To grasp the fundamentals of cryptocurrency taxation, investors must first comprehend when they must file taxes on their bitcoin holdings. To begin with, merely purchasing virtual currencies with US dollars and retaining them within the exchange where they were purchased or transferring them to their wallet does not entail that they will be taxed. After people use crypto as a method of exchange, cryptocurrency becomes taxed. Selling the cryptocurrency for US dollars, swapping one cryptocurrency for another, and then buying another cryptocurrency to pay for products or services are all examples of this.