Filing taxes rarely ranks as a favorite activity among income earners. They love getting refunds, but often feel intimidated by the steps required to file correctly and avoid audits. If you’re a cryptocurrency investor, there are several things to keep in mind as you learn how to report cryptocurrency gains and satisfy tax requirements.
1. The IRS classifies cryptocurrencies as property
One of the things people typically like about cryptocurrencies is that they allow people to exercise control over their financial decisions without being connected to traditional banks. The law still regulates cryptocurrency to some degree, though. In the United States, Bitcoin regulation came into place when the IRS declared that, for federal tax purposes, cryptocurrencies are property, not currency.
As such, you’ll report cryptocurrencies as short- and long-term capital gains or losses. The cryptocurrency tax rate changes depending on how long you hold the investment before you decide to sell it. It also varies per your income bracket.
2. How to report cryptocurrency gains
Get started by obtaining Form 8949 from the IRS. Then, understand that a short-term capital gain occurs from the sale of an asset — cryptocurrency, in this case — you’ve held for less than a year. Short-term capital gains get taxed at the same rate as ordinary income.
On the other hand, holding your assets for more than a year before selling them makes them result in long-term capital gains, which have a reduced tax rate of 0, 15 or 20 percent. Your earned income determines your rate.
When filling out Form 8949, you must report the date of purchase, the date of sale and the proceeds. When reporting gains, subtract any transaction fees before recording the amount. Plus, when indicating the amount, do so in dollars to represent the fair market value on the date of receipt.
Since Form 8949 relates to investments, investors who support cryptocurrency projects on crowdfunding platforms may have already used it to report non-cryptocurrency tax events to the IRS.
Finally, keep in mind you’ll need to transfer the information 8949 to a Schedule D, which is a summary of the information shown on Form 8949.
3. Specifics about reporting losses
It’s certainly helpful to know how to report cryptocurrency gains, but it’s necessary to get clarity about reporting losses, too. As a start, if you have not reported cryptocurrency gains in previous years but will be reporting losses this year, it’s a good idea to amend the returns from past years to show the gains. That way, everything matches up and shouldn’t trigger an audit.
Indicating your losses to the IRS doesn’t involve knowing the applicable cryptocurrency tax rate for the respective income bracket, but there are other stipulations. Firstly, the IRS imposes a limit on deductible losses of $3,000 per year or $1,500 if married and filing separately. But, if the total net losses are more than those limits, taxpayers can transfer it to next year’s return as a carryover loss.
4. Consider using a cryptocurrency tax calculator
People should gather their cryptocurrency transaction records before starting to file their taxes this year. Fortunately, many cryptocurrency exchanges keep those records for customers, and transaction history may also appear in a corresponding app.
After retrieving that information, many individuals find the next steps more straightforward when they use cryptocurrency tax calculators. They vary slightly depending on the provider, but users generally input information in the correct fields and let the tool add up the amounts for them.
The TaxAct Bitcoin Tax Calculator is a digital representation of what’s on Form 8949, so people can type amounts in the fields instead of writing the information by hand. You also have to know your income, which gets used to calculate the cryptocurrency tax rate. Once you add the specifics, the tool separates short- and long-term capital gains.
There’s also the simply named BitcoinTaxes. It requires filling out a short registration form, but it facilitates making tax calculations for several countries besides the United States.
People who already use cryptocurrency analytics platforms may find that those products have built-in tax calculators for Bitcoin, too. For example, CoinTracking has a capital gains reporting feature.
5. An accountant could give valuable help
Individuals who are accustomed to reporting gains and losses related to their other investments will find fulfilling tax-reporting obligations for cryptocurrency comes naturally. However, if you break into a sweat at the mere thought of self-preparing your taxes, it may be worthwhile to get assistance from an accounting professional.
Before making an appointment, clarify you have cryptocurrency investments to report in this tax year. The rising popularity of cryptocurrencies means accountants have had to educate themselves on how they impact taxes.
6. The tax specifics for cryptocurrencies may change
This overview covers the basics, but you may find hiring an accountant helps you have peace of mind and saves time you’d spend calculating taxes. Besides being aware of the things mentioned here, it’s a good idea to stay abreast of potential new developments that the IRS may publicize. The organization currently refers to cryptocurrencies as “virtual currencies,” and released documents to browse on the subject.
But, the IRS can make different decisions about any taxation topic for future tax years. Keeping your knowledge current should help you feel better-equipped at tax filing time.
(Featured image by Dan Eady via Shutterstock)
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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