Will I Be Taxed by the IRS for My Cryptocurrency Gains?
Mar 03, 2023
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Generally speaking, all US citizens are required to pay federal income taxes on their bitcoin earnings. Even though some people might not think it's the most fascinating aspect of cryptocurrency trading, you should be informed of how bitcoin earnings are taxed if you decide to do it.The cryptocurrencies are a new technology that are still in their infancy, but the IRS is taking action to ensure that they abide by applicable tax rules. Numerous avenues exist for you to owe taxes on cryptocurrencies, and merely trying to exchange one coin for another results in a taxable gain. It could be difficult to put together your earnings or losses during tax season if you don't keep accurate records. The following are some crucial details about cryptocurrency taxes:
When are bitcoin taxes due?
Cryptocurrency has several uses, including the ability to be purchased, held, paid in, and used in a number of transactions. Because not all of these acts are taxable, the following are the lists of those who must pay cryptocurrency taxes:
Earn money through mining
Bitcoin is not the only way to acquire digital assets, thus some people make money by mining cryptocurrencies. Cryptocurrency mining, which includes employing complex algorithms that miners must solve using computers, creates new currencies. The miners are then compensated with bitcoin. When you receive bitcoin from mining, one of the 1099 tax forms is used to record the fair market value of a cryptocurrency. An information-sharing document known as a 1099 is utilized by the paying party to report income to the IRS. Third-party applications like DoorDash utilize a 1099-K form to disclose the payments they made to delivery drivers.
One coin exchanged for another
When investing in cryptocurrencies, you have the option to trade your cryptocurrency. Before trading in the original coin for another, it must be formally sold. If you sell cryptocurrency for a profit and must pay taxes on the transaction, your gains are taxed in this manner.
Gain or Loss from Cryptocurrencies
Bitcoin gains must pay federal taxes, same like stock profits. Since virtual currencies are considered to be property, investors who use them must pay capital gains taxes on their earnings. The amount of tax you owe will depend on your profit margin and how long you held the bitcoin before selling it. As a result, you’ll have to pay taxes on short-term capital gains, which is when you possess a cryptocurrency for less than 365 days. On the other hand, long-term capital gains taxes would apply if you held onto crypto assets for more than 365 days.
You may participate in this process and receive rewards if you stake bitcoin, but those advantages are taxed.
Taxes for Cryptocurrencies: How to File
The most important thing for companies and investors to understand is that when filing their taxes, they must tell the IRS about their bitcoin holdings, profits, and losses. You must adhere to specific processes in order to file your bitcoin tax returns with the IRS.
Find out what, if anything, is owed — If an investor carried out a bitcoin transaction from the above list, there can be a tax liability.
You must declare any bitcoin transactions on your tax return, so keep track of all transactions and submit them. Just as with stocks and other investments, the IRS requires this paper trail to ensure that a person declares their full tax liability. A crypto exchange will frequently give the investor a transaction history.
Include the required paperwork with your tax return. — The IRS may want various paperwork, depending on how a person has used their bitcoin. To list and summarize capital gains or losses, you may, for instance, calculate capital gains or losses on Form 8949 and report the findings on Schedule D of Form 1040. Use Schedule C on Form 1040 to record gains and losses on your other self-employed income.
Final words
The IRS is stepping up its efforts to ensure that bitcoin investors pay their taxes. The tax consequences of cryptocurrencies are confusing and complex, so investors should be aware of it. There are several options available to cryptocurrency investors who want to reduce their tax obligations, such as purchase and hold, tax-loss harvesting, charity giving, etc. Download FlyFin to make filing your cryptocurrency taxes easier. To calculate your taxes correctly, you may also utilise a 1099 tax calculator.