With US Tax Season Around the Corner, Here’s How to Report Crypto Activity to the IRS

The key to properly filing taxes on cryptocurrency comes down to excellent record-keeping, the correct IRS tax forms, and knowledge about what qualifies as income versus capital gains.

Handle Tax Filings With Care to Avoid Any Audits

Although the traditional April 15th deadline for filing US taxes has been pushed to May 17th, there is no time like the present for organizing cryptocurrency transaction records.

At this point, all cryptocurrency transactions are taxable in some constellation, so it’s vital to familiarize yourself with the nuances to ensure you fill in the accompanying tax forms correctly. To give you the inside scoop on streamlining your filings, Bitcoin.com has enlisted advice from Shane Brunette, the CEO of Cryptotaxcalculator.

How Capital Gains In Crypto Work

Like a stock sale can result in a positive return, resulting in capital gains tax exposure, cryptocurrencies operate similarly. However, exchanging cryptocurrency for fiat currency is only one type of taxable event.

According to Brunette,

Crypto to crypto trades trigger a capital tax event, whereas transactions such as airdrops and staking rewards are classified as income. Importantly, you can only use capital losses to discount a maximum of $3,000 from any ‘income’ earned from crypto.

That means that converting cryptocurrency to fiat currency, another crypto, or using cryptos to purchase goods and services can all be treated as capital gains events. In terms of tax rates, it depends on how long the cryptocurrency was held.

For short-term trades or activities (less than one year), any gains will be taxed at the individual income tax rate. Cryptocurrencies held for more than one year will likely be taxed at lower rates, ranging from 0-20%, depending on an individual’s income tax bracket.

When Crypto Returns Are Treated as Income Instead of Capital Gains

As mentioned above, not all crypto transactions fall under the capital gains umbrella. Many other potential activities can fall under the income category.

These include any income received from cryptocurrency mining, liquidity pooling, node staking and validation, interest earned from decentralized finance (defi) lending, and receipt of crypto payment for goods and services.

When income is received from any of the above activities, it is taxed at the same prevailing rate that the individual pays on other income received during the year.

Airdrops, Awards, and Giveaways

Like the treatment of mining and staking rewards, crypto airdrops, awards, giveaways, and even bug bounties are also treated as crypto income. Because these activities all result in some sort of income derived from the crypto ecosystem, they fall under the income tax category instead of being treated as capital gains or losses.

How to Pull Transactional Records

Due to a lack of uniformity across platforms, pulling information can be entirely straightforward or slightly confusing. Accordingly, it’s essential to keep good records and ensure you can combine all the transactions within one report to make filing that much easier.

Cryptotaxcalculator’s Brunette adds the following valuable, actionable tip,

Carefully account for fees. You will be surprised how quickly this can add up to significant savings. If the fee is paid in crypto, you will also need to account for the capital gain/loss on the fee itself.

The Forms You Need Ready

After compiling all the cryptocurrency transactions carried out over 2020 and determining whether they fall under capital gains or income, the filing process can commence. Several forms need to be completed depending on the nature of the transactions.

Per Shane Brunette,

Form 8949 and Schedule D are used for reporting capital gains, but if you have any transactions that are classified as income, you will also need to complete Schedule 1 (Form 1040).

Some Final Thoughts On Taxes

As entering the cryptocurrency ecosystem becomes ever-easier, taxable actions are on the rise in tandem. Fortunately, it is easier than ever to file taxes on cryptocurrency, and organization is a crucial element of this effort. In his final actionable tip, Brunette concludes that the best preparation starts with excellent recordkeeping.

Keep your records up to date throughout the year. Even moderate trading activity can quickly add up to hundreds of transactions, and the IRS requires you to record everything in USD. If you take some time to get set up with automated tax software at the start of the year, it will become trivial to file your taxes come tax time.

Are you planning to do your crypto-taxes by yourself or do you plan to have an accountant do it for you? Let us know in the comments section below.



from Bitcoin News https://ift.tt/3ucETwQ
With US Tax Season Around the Corner, Here’s How to Report Crypto Activity to the IRS With US Tax Season Around the Corner, Here’s How to Report Crypto Activity to the IRS Reviewed by Sandeep Kushwaha on March 31, 2021 Rating: 5

No comments:

Powered by Blogger.