With all the hype around cryptocurrencies, it’s no surprise that more and more investors are turning to it as a viable option for investment. Cryptocurrency has become so popular that the IRS has started to take special interest in it, and with that comes the all-important question of how to report cryptocurrency taxes.
It is important for crypto investors and traders to understand their obligation to pay taxes on their crypto activities in order to remain on the right side of the law. In this article, we will provide an overview of cryptocurrency taxes for investors, traders and miners.
What are Cryptocurrency Taxes?
Cryptocurrency taxes are basically the same as other forms of taxes, as they require you to declare any capital gains or losses when filing an income tax return.
In the U.S., the IRS treats cryptocurrency as property and not currency. Thus, crypto-to-crypto trades, crypto investment, and crypto mining activities all have tax implications.
Cryptocurrency Taxes for Investors
Cryptocurrency investors, like stock or bond investors, must report all income earned on cryptocurrency investments on their taxes. The IRS classifies any Bitcoin or other cryptocurrency held for less than one year as a short-term capital gain, and any held for more than a year as a long-term capital gain. Short-term gains are taxed as ordinary income, while long-term gains are taxed at a lower rate.
Crypto-to-crypto trades must also be declared and the difference between the cost basis (what you paid for the cryptocurrency) and the new basis (what you sold for) must be reported.
Cryptocurrency Taxes for Traders
Traders are also subject to capital gains taxes. However, there is an important distinction between traders and investors. If you actively trade cryptocurrency (buying and selling often) then you are considered a trader and can utilize more advantageous “trader status” to reduce your taxable income.
Traders typically make use of deductions such as business-related expenses and the “Section 475 Mark to Market Election” to reduce their taxable income.
Cryptocurrency Taxes for Miners
Crypto mining is another activity subject to taxation. Miners are required to report their income as they receive it, and calculate their taxable gains by subtracting the cost basis of their machines and other related costs (such as electricity) from the total gross income.
Taxpayers that are organized as a business entity may be able to deduct more of their costs, and pay lower taxes.
What Records Should be Kept to Report Crypto Taxes?
It is important for crypto investors, traders and miners to keep accurate records of their crypto-related activities. These records will be needed when filing crypto taxes.
To help crypto users keep track of their crypto investments, the IRS recommends keeping detailed records including the purchase date, purchase price, sale date and sale price of each individual cryptocurrency transaction.
Cryptocurrency investors are also required to keep track of all their cryptocurrency wallets, as the address and date of each wallet must be recorded.
Where to Report Cryptocurrency Taxes?
The IRS considers cryptocurrencies as “property” which means it must be reported on the individual’s tax form as a capital gain or loss. This is reported on a Form 1099-B or 8949.
Cryptocurrency traders and miners must report their income from these activities on the IRS tax form 1040, just like any other income.
Penalties for Not Paying Cryptocurrency Taxes
The IRS takes cryptocurrency taxes very seriously and failure to report capital gains or income on cryptocurrencies can result in significant penalties.
Tax penalties for not reporting crypto-related income can range from as little as 20 percent to as much as 40 percent of the total tax amount due. Taxpayers that underreport their assets by more than 25 percent may also be subject to criminal penalties.
Cryptocurrency taxes are no different than taxes on other assets or income; they are subject to the same reporting and taxation rules as other income sources. It is extremely important for crypto traders, miners, and investors to understand their obligations in reporting their crypto-related activities and ensure they remain compliant with the IRS.
The most important piece of advice we can offer is to keep accurate records of all crypto-related activities, including purchase and sale dates, amounts, costs, and wallets. Doing so will make filing taxes a much smoother and easier process.
Be sure to consult a tax professional when filing cryptocurrency taxes, as there are numerous complexities when dealing with crypto-to-crypto trades and other cryptocurrency-related activities. A qualified tax professional can help ensure that you are properly filing and paying the correct amount of taxes.
