Crypto taxes are not as straightforward as you think. There are certain provisions in the new crypto tax law that makes taxing of crypto not exactly a walk in the park. Besides that, the Internal Revenue Service is not clear about certain provisions within the same crypto tax law. Ultimately the burden lies on the taxpayer.
The taxpayer has to revise all crypto trades made, compile all the necessary information by himself, then determine whether he or she has made a profit or not. Tools like BitTaxer do come in handy when it comes to crypto tax matters.
The tax season is here, and we have to file returns, crypto included. But before we do this, we need to understand what entails cryptocurrency taxes.
Crypto Sales Are Taxable
As per the law, the US IRS demands that all traders submit their reports regarding all individual trades and cryptocurrency sales.
This law also includes crypto that is spent, sold, converted to USD or to other cryptocurrencies. Therefore, crypto exchange traders inevitably fall into these brackets.
Huge Fines If Not Paid
Some traders may be unwilling to submit these reports or pay these taxes for one reason or the other. This is considered a tax fraud and can lead to a $250,000 fine or a jail term not exceeding five years.
It won’t be the first case where the IRS has exercised its judicial powers against crypto traders. In a 2017 case, the IRS, through the courts coerced Coinbase to release trading information on a trader who had traded over $20,000 on the platform between 2013 and 2015.
Two Types Of Crypto Taxes
According to an IRS guidance of virtual currencies, cryptocurrencies are considered property in the US. Therefore, this means that the taxpayer has to pay the capital gains tax on the ‘property’
Now, capital gains in the US can either be long term or short term. Long term taxes applying to cryptos that have been held for over a year before finally being sold. Short term taxes, on the other side, refers to cryptos that have been held for less than a year. Long term capital gain taxes are relatively lower than the short term
Cryptos can also be subjected to income tax. These include employees who get paid in crypto. They have to declare their earnings which are subject to IRS’ seven tax brackets
Miners Are Not Exempted
Traders and investors inevitably have to pay capital gains taxes, and so does miners. Crypto earnings by securing networks fall under the category of income taxes by way of self-employment.
Note that, not everything crypto is taxable. In case of a loss when trading, you can claim a loss. Doing so saves you on capital gains taxes
Tools To Help You File Crypto Tax Returns
Those who have tried filing crypto tax returns know how complex the issue can be. Tracking every single transaction made within the year is tedious and time-consuming. It gets more complex if the trader has engaged in crypto mining.
But luckily, there are tools out there provided by crypto exchanges like Bitfinex and Coinbase to help in such situations. Tools like BitTaxer designed for both individuals and CPAs supports the majority of crypto exchanges.