If you’re a cryptocurrency owner, then you might be surprised to learn that your transaction could affect your tax bill this year. The IRS considers Bitcoin and Ethereum to be capital assets, which means they’re subject to the same capital gains tax rules as other types of investments.
If you’re an owner of a cryptocurrency for less than a year, then you’re not required to pay taxes on your gains. However, if you’ve been holding it for more than a year, then you’ll be able to claim a lower long-term capital gains rate. If you sell your cryptocurrency at a loss, then you can still claim a capital loss. This type of loss can be used to offset other income taxes.
When you purchase goods or services using cryptocurrency, it’s considered a sale of that asset. As a result, you’ll be required to pay capital gains taxes on the increased value of the goods or services.
Taxes When You Mine for Crypto
If you earn cryptocurrency through mining or selling it, then it’s considered part of your regular income. You’ll be required to pay taxes on the entire value of the cryptocurrency on the day it was received. If you hold the same cryptocurrency that you mined or sold, then you’ll be required to pay capital gains taxes on the increased value of the asset.
How to File Taxes For Crypto Transactions
Before you start preparing your taxes, make sure that you’re aware of all of the details related to cryptocurrency transactions. For instance, if you bought or sold virtual currencies during the year, then you’ll be required to report these transactions on your Form 1040.
Keep Complete Records
You need to keep track of all of the details related to your cryptocurrency transactions. This includes the amount of money that you paid for it, how long you held it and how much you sold it for. Although most cryptocurrency exchanges will provide a 1099-B report detailing the details of your transactions, they might not record the exact cost basis of the cryptocurrency that you purchased.
Use Correct Tax Forms
There are many types of crypto transactions, and each will need a different tax form completed. Form 8949 is a form that records all of the details related to your cryptocurrency transactions. It should also include the date and price of the transaction. Schedule D is a form that will summarize your capital losses and gains from all investments, including your crypto investments.
If you received coins from mining, then you need to include the details of the transaction on a Schedule C form. If you’re a self-employed person, then you may be required to pay taxes on your income and not be able to deduct the expenses related to crypto mining. However, you can still claim these as an expense on a Schedule 1 form.
Filing Your Taxes
You can keep track of all of your cryptocurrency transactions through Koinly or CoinTracker. You can then use online tax software to file your federal and state tax returns.