When the tax season is around, no earnings can escape the watchful eyes of the tax scanner, and cryptocurrencies are no exception. Some people believe that crypto taxes are quite complicated, and that’s why they don’t file them. Many even see it as a way to move money illegally by avoiding the taxes entirely. However, the Internal Revenue Service is focusing on digital assets more than ever, and here are a few things you need to know about cryptocurrency taxes:
All crypto trades are taxable
Similar to all your yearly earnings, your crypto incomes are also taxable. You need to report your trades to the IRS. From exchanging cryptocurrencies to converting them back to USD, everything comes under the respective tax slab. If you fail to file your crypto trading taxes and don’t pay them on time, you will be committing tax fraud, and it can lead to a prison sentence of almost five years or a fine of about $250,000.
Types of cryptocurrency taxes
The IRS treats cryptocurrency as a property, and not as a currency. This means investors need to pay capital gains tax. That is why there are two types of taxes on cryptocurrency: long-term and short term. Short-term taxes are the ones you have to pay for holding digital currencies for less than a year, and long-term is for the currencies that you already have for more than a year before you trade or sell.
Just like how you would test the Bitcoin Loophole and other crypto trading platforms to help you learn about the crypto market trends, you can calculate the approximate tax you have to pay for both short-term and long-term investments by following the IRS calculator.
Crypto miners should also pay taxes
The earnings of crypto miners are also taxable. Mining is a means of self-employment, and so there’s a self-employment tax waiting which is approximately around 15.3%.
However, there are no taxes if you are buying or holding cryptocurrencies. Whether you are a miner or a regular investor, there’s no charge for buying digital assets; it is only when you sell or trade cryptocurrencies that your earnings are subject to taxes. However, if you lose money while trading, you can claim a loss. This allows investors to save a significant amount of money on capital gain taxes.
Crypto tokens are exempted from tax slabs
The last update on cryptocurrency taxes came in 2014. Although a lot has changed in the crypto world, the rule that tokens are not subject to federal tax laws still exist. Tokens are cryptocurrencies that represent an asset or a service, but not a currency.
The IRS says that taxable crypto is virtual currencies that are equivalent to real currencies. Since tokens don’t match this definition, they are usually exempted from the tax books. But it is always wise to consult with a lawyer or certified accountant whether to include or exclude them from your crypto tax files.
Paying cryptocurrency taxes is similar to your income tax or capital gains tax. It is not as complicated as many think it is. So, file your books carefully because you wouldn’t want to be blacklisted for tax fraud cases.