Cryptocurrency is popular, but its tax ramifications may be complicated. Learn how cryptocurrency is taxed and if you should sell it or accept it as payment.
What you will discover:
How much must I earn from cryptocurrency in order to declare it on my taxes?
Do I have to disclose cryptocurrency on my taxes if I do not sell it?
How can I pay taxes on revenue earned from crypto work?
How long should I keep cryptocurrency?
Is cryptocurrency trading comparable to stock trading?
Cryptocurrency is as popular as it has ever been. Moreover, despite the fact that it is a virtual asset, the IRS has said that transactions involving cryptocurrency are normally taxed in the same manner as transactions involving any other property. Do you understand how selling or owning crypto affects your total tax burden? Do you have a strategy in place for monitoring your cryptocurrency transactions? This post will address these issues as well as explain how to disclose cryptocurrency transactions on tax returns.
Table of Contents
How much must I earn from cryptocurrency in order to declare it on my taxes?
In general, there is no minimal threshold for reporting cryptocurrency sales or exchanges on your taxes. If you sold or swapped cryptocurrency, you must report such transactions on your tax return.
When cryptocurrency initially became available, there was some ambiguity about how it would be taxed and when transactions would need to be recorded. However, the IRS has since issued significant guidance on how to treat cryptocurrency transactions in various situations.
It is important to understand that cryptocurrency is not taxed as a currency. Instead, it is taxed as if it were property. Furthermore, cryptocurrency is sometimes taxed as a long-term or short-term capital gain. However, in some cases, such as receiving cryptocurrency as compensation, crypto is taxed as ordinary income. Although IRS guidance has provided some clarity on these scenarios, tax law remains a complex area. If you have any questions concerning the tax consequences of receiving or selling cryptocurrency, you should consult with a lawyer or tax specialist.
Many crypto exchanges have also implemented reporting to make crypto taxes less onerous. Many cryptocurrency exchanges allow you to download tax reports that detail all of your transactions as well as the capital gains and losses associated with each transaction. These reports make it easy to disclose your cryptocurrency transactions on your tax return. If you acquire or dispose of cryptocurrency outside of an exchange, it is critical that you keep accurate records for each transaction.
Do I have to disclose cryptocurrency on my taxes if I do not sell it?
Typically, if you sell or swap crypto during the tax year or get crypto as pay for services completed, you must disclose it on your tax return. So, even if you did not sell your cryptocurrency during the tax year, you may still be required to report cryptocurrency transactions on your tax return. Even if you had no taxable cryptocurrency transactions during the tax year, the IRS requires you to answer a question on your individual tax return about whether you received, sold, swapped, or otherwise disposed of any financial interest in any virtual currency during the tax year.
An transaction of cryptocurrency that results in a taxable event happens whenever you trade cryptocurrency for anything else. Exchanging one sort of cryptocurrency for another is a popular example. For example, if you swap one BTC for fifteen ETH, you must disclose the transaction on your tax return. A reportable transaction occurs when crypto is exchanged for an object or service. For example, if you exchange cryptocurrency for a meal at a restaurant, you must report that transaction on your tax return.
When you have hundreds or thousands of transactions over the tax year, taxes on cryptocurrency might get complicated. Many individuals are unaware that trading cryptocurrency for products or services is a taxed transaction. You may save yourself a lot of trouble by keeping track of your cryptocurrency transactions throughout the year. If you need assistance reporting crypto transactions on your tax return, our tax specialists are here to help.
How can I pay taxes on revenue earned from crypto work?
If you are a W-2 employee, any cryptocurrency income you get will be taxed in the same way that a traditional salary would be. You will still be required to pay Social Security and Medicare taxes on your earnings, and your salary will be subject to standard income tax. Although your employer may offer to pay you in cryptocurrency rather than US dollars, your employer cannot force you to accept cryptocurrency if you prefer to be paid in US dollars.
Crypto that you get as an independent contractor or self-employed person will be considered self-employment income. According to the IRS, you will be taxed on the fair market value in US dollars of the cryptocurrency you get in exchange for the services you perform. The cryptocurrency will be subject to self-employment tax and regular income tax, just like cash. If you have any more concerns about the tax ramifications of taking cryptocurrency as payment for products or services, consult with a lawyer or tax specialist.
How long should I keep cryptocurrency?
The length of time you own crypto depends on your risk tolerance and your financial objectives. From a tax standpoint, it may make sense to keep crypto for more than a year in order to pay taxes at the preferred long-term capital gains rate rather than the higher short-term capital gains rate. However, since cryptocurrency prices fluctuate, there is no assurance that your crypto will be worth the same amount in the future as it is now.
It is suggested that you speak with a financial professional or a CPA if you need help assessing if it is time to sell your cryptocurrency. Because of the volatility of cryptocurrency, most experts advise avoiding investing more than you can afford to lose. Investing in cryptocurrency may be dangerous, and you might lose your whole investment.
Is cryptocurrency trading comparable to stock trading?
Crypto exchanges have made cryptocurrency trading as simple as stock trading. Crypto and equities, on the other hand, are two quite distinct sorts of assets.
You may usually make money by investing in stocks in one of two ways. You may sell the shares to another investor for a higher price than you paid for it. Furthermore, some companies will pay dividends to their stockholders on a regular basis. In general, the only way to profit from cryptocurrency is to sell it to another investor. You do not own a share in a firm that may generate a profit and transfer a piece of that profit to you in the form of a dividend since your ownership in crypto does not generally reflect ownership in an actual corporation.
Stock and cryptocurrency regulations vary greatly as well. Stocks are tightly controlled and traded on heavily regulated exchanges such as the NASDAQ and the New York Stock Exchange. Despite the fact that cryptocurrency is gradually becoming the subject of new rules, the existing absence of restrictions might make cryptocurrency less secure and more vulnerable to frauds.
