Understanding cryptocurrencies can be pretty difficult for some people, and when we add taxes to it, it becomes a science-level operation, that often is a reason for the interested enthusiasts to give up, without even trying. Yes, we all know that the crypto market is tricky, and no matter how similar it is to the fiat financial system, it has a lot of differences too. The main reason for that is the decentralized monetary system, which means there is no bank to regulate the rates and price fluctuations. But, it doesn’t mean that it’s not taxable in some areas around the world.
Another thing that is important to know is the fact that cryptocurrencies are still illegal in some countries, and even if you earn them, you can’t use them, or if you try to do that, it can be considered a high-level crime. But, there are still some places around the globe that are good with cryptos, but you should be ready for everything. And we say everything, we really mean everything. The worst-case scenario for most people is price dropping over the night, but we can say that the fact every cryptocurrency can disappear without an announcement is even more frightening.
According to comfortskillz.com, Bitcoin trading is one of the ways every novice can get into this market, and see how it works. Some of the currencies can be accessed by tokens, others through mining, but trading is available for everyone.
Once you have some cryptos in your pocket, no matter how did you get them, you have to be aware that it’s a taxable income, and it may affect your tax bill. The fact that the taxаtion laws apply to Bitcoins and other crypto earnings are good because it gives us enough hope that they will be accepted as real money soon. The USA’s IRS (Internal Revenue Service) treats all your profits made of selling cryptos as an income, and it should undergo some tax calculations using a service like TurboTax Premier.
Let’s give an example, that will make things clearer to you. If you had some Bitcoins that were bought or earned back in time when one of them was worth just a couple of hundred dollars, and you used the same amount back in February, when the price peaked, that means you made some profit. When you use that amount of money to buy a car or a house, you already paid some of the taxes.
But, once again, different tax regulations apply to different state’s finance systems, and if you want a transparent financial history, then you have to be completely informed how these things work, and consider the crypto earnings as regular money income or even an investment.
In general, if you have the crypto capital with you (or on your wallet) for less than a year, it’s taxed as your usual income. If you keep long-term gains, then they are taxed with lower rates, depending on many other factors related to your income.
In order to file your crypto taxing application, you have to:
1. Save records for all transactions
When did you earn them, how did you exchange them, and also the day you spent some of them. Keep everything that can be important and used as proof of work. You should do that, even if you make thousands of transactions every year. Your trading account saves logs for your transactions, but you can still track your activity with additional tracking software, or the transfer logs on your digital wallet. With all of that, you have every information you need to fill the tax forms.
2. Get informed about the proper tax forms
Depending on what type of income you report, you have to use a different form. In the USA there are a few different tax file forms, and some of them are used when you invest, others when you trade, and also if it’s a hobby or a serious source of income for you. Get informed on time, because most of these forms can be confusing if you are in a rush.
3. File the taxes, and don’t mind asking for help
Sometimes you can complete this task using automated software that will calculate the returns. Also, if you think this is too complicated for you, you can always hire a professional who will help you fill the forms, ensuring that you won’t make any mistakes. It’s always a good idea to hire an accountant, and you can be sure you won’t oversee anything.
According to the 2014 IRS rules, crypto assets are treated as capital assets, more similar to stocks than fiat currencies. This decision was made because the citizens treated them as free and open finance assets, and as they gained popularity, some regulations were required. Knowing that the prices can go up and down, and if today one Bitcoin is worth between $40,000-$50,000, we can expect some changes, meaning that even tomorrow the price can rise or drop. If it rises, the user is making a profit, and if it drops, the cryptocurrency holder is facing a capital loss. No matter how things go, these gains are taxable, since they are considered as capital gain, not a usual income.
In order to estimate how much you owe, you should consider if it’s your long-term or short-term gain, do you use it to pay for goods, but also did you mine it by yourself, or got the crypto coins as a gift, or a payment for some service. There are plenty of things you need to know and remember, and that’s why it’s important to keep track of every activity you have. Everything is important and will help you pay the exact amount for the taxes.
Even though it seems like a lot of work, it’s completely fine, because you can be sure everything is calculated and paid, and won’t lead to further headaches if some problem appears. Be a responsible citizen, just like you are when it comes to your regular fiat money earnings and savings.