With the incredible rise in crypto trading, many people have gone on to the market to avoid paying taxes. Since cryptocurrencies were a new financial market, it took the IRS some time to reach them. The confusion surrounding the market, how it works, and if cryptocurrencies counted as an actual currency still persisted.
Therefore, they were not able to bring about any concrete changes to the tax laws. But times have changed, and the rising popularity of the market has led to concern by the IRS as well as the President. In other words, it is safe to say that the IRS will soon be cracking down on cryptocurrencies as a whole.
But if you trade cryptocurrencies and still keep your taxes up to date, it is still possible to not pay taxes on your crypto assets. Many people simply don’t know that cryptocurrencies count as taxable assets, or they don’t know how to report them.
Remember, the IRS does not take tax collection lightly. If you owe them taxes, it would be best that you start working on your crypto taxes as well. Either way, here is a small guide on how to prevent tax evasion when you are trading cryptocurrencies.
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The first step to responsibly paying off your taxes is to identify all of your taxable transactions. Even if you are the type to just hold onto your cryptocurrency to let it build value, you might want to take another look. The chances are that you might have made certain transactions that qualify as taxable.
Let’s say that you receive a gift from a friend through Airdrop, or you might even have won crypto from a giveaway. Either way, how you choose to spend this Airdrop will define whether or not you will have to include it in your forms.
Simply put, an airdrop is usually money that you receive as a gift or from some sort of giveaway. You could have even won a lottery with your cryptocurrency, and it will still count as an airdrop.
If it is just staying inside your wallet, then it is not taxable. But if you received crypto in a fork, you will have to pay taxes for it. Since you have the ability to sell, transfer, or even exchange it, this crypto should be in your form.
Interest that you earn through your cryptocurrencies, including staking rewards, will qualify as taxable income. Regardless of how little you even earn, you will still have to include it. Simply put, the money that you earn from the rising prices will be a part of your tax form.
Many companies have started offering their employees compensation through cryptocurrencies. Freelancers are most likely to receive their income in cryptocurrency. The IRS will consider this crypto as compensation, which you can also refer to as a salary. The IRS will tax this income according to your tax bracket.
Mining cryptocurrency is possibly the biggest gray area with regards to taxing cryptocurrencies. Since individuals do not necessarily buy it to obtain it, the question always remained if they should even report it. Well, the IRS has answered this question, as various mining various big cryptocurrencies are taxable. They consider these cryptocurrencies as personal income, and you will have to include them when calculating your taxes.
Before they started to consider cryptocurrency as a currency, buying crypto with crypto was not taxable. But since then, the IRS now sees cryptocurrencies as a form of currency, and therefore they can tax them. So even if you are exchanging cryptocurrencies, you will have to pay taxes on the amount you exchange.
If you pay for services or buy anything using cryptocurrencies, it is now a taxable transaction. So if you were to buy a pizza, for example, using Dogecoin, you owe the IRS taxes on that transaction. Even if you pay someone for their services using Bitcoin, it is your responsibility to pay the taxes on that transaction.
Finally, while buying crypto is a taxable transaction, it is the other way around as well. If you transfer your cash into cryptocurrency, you will also have to pay taxes. You will have to pay these according to their fair market value in US dollars.
With all of those transactions, you might be wondering what doesn’t count as a taxable transaction. The answer: a few things. While it is true that the IRS will be taking a sizeable portion of your transactions, there are others that they will leave behind.
When transferring cryptocurrencies from one wallet to another, you will not be facing any taxes. This is a relief for many people, as it’s common to move their crypto tokens from one wallet to another. Even if you were to send your tokens to something like Coinbase, you would not have to pay taxes.
As of now, holding cryptocurrencies does not count as a taxable transaction. Therefore, even if you happen to buy cryptocurrencies, as long as they are in your wallet, the IRS can’t touch them. But as soon as you spend or exchange it, it becomes a taxable income.
Another exemption for a taxable transaction is charitable contributions and gifts. While we did mention gifts earlier, it is worth diving deeper into it.
If you donate your crypto to a charitable organization, you can claim it as a deductible. Of course, the charitable organization itself needs to be a 501 (3), otherwise, it will not count. Not only do you not have to pay taxes on your payments, but you can even make them part of your deductibles.
The IRS has a limit as to how much you can send someone as a gift. As long as your yearly value of crypto gift stays under $15,000 for every recipient, you will not have to report it in your taxes. But when gifts cross the $15,000 mark, they will have to be a part of your taxes.
As we mentioned earlier, receiving cryptocurrency as a gift does not make it a taxable transaction. As long as you hold onto that gift, you will not have to report it. But as soon as you make a transaction, you will not have to report said transaction in your tax form.
After you have compiled all of your transactions and filtered out all of the taxable ones, you now have to do one last thing. You will have to determine if these transactions were a gain or a loss. Simply put, you need to go through each and every transaction to see if you lost or gained money on it.
Losses can be especially helpful in this situation, as they can help offset capital gains in a year. So the losses that you incur on your cryptocurrency will allow you to add it to your deductible, unlike losses of your car.
Chances are that you did not buy all of your cryptos at once. You might have bought portions of certain cryptocurrency at different intervals, which means that they cost different amounts at different times. So now, you will have to find out which rate you should be using to record the transaction.
You might think about using the first purchase as a baseline or the last one. Or you could use a specific identification method to identify the price. Either way, the best thing that a customer can do is to consult a dedicated tax advisor.
Even if you are someone who likes to handle issues on their own, it is possible that these taxes fall beyond your knowledge. Not only are they incredibly complex, but they can be very difficult to understand. So if you feel like you cannot manage on your own, then it might be time to work with a tax advisor.
They can best guide you on how you should be compiling your information and what things you should change. They can also tell how best to calculate the cost of your taxes.
Since the hype surrounding cryptocurrencies is growing at such an exponential pace, it was only a matter of time before the IRS caught up with them. But since it is a new financial market, it can be very easy to accidentally avoid paying taxes. So hopefully, with this guide, you have gotten a better understanding of how to prepare your crypto taxes.
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Written by: Lyle Solomon a principal attorney for the Oak View Law Group ovlg.com
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