Cryptocurrency investment is one of the hottest topics in any money-making discussions today. With the popularity of cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and Binance Coin (BNB), today’s investors are on the lookout for ways to invest in digital currencies and make profits off their investments.
However, as people are beginning to adopt cryptocurrencies globally as a payment method, with some regions even procuring and installing cryptocurrency ATMs, dealing with cryptocurrencies is now a taxable event.
In today’s article, I will be demystifying cryptocurrency taxes and outlining everything you need to know about crypto taxation in 2023 and beyond.
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An Overview Of Crypto Taxation
Cryptocurrency taxes are imposed by the tax authority (the IRS in the US) on the profits/losses you incur from trading or investing in cryptocurrencies.
As with other investment vehicles like real estate or stocks, the IRS considers cryptocurrency as property, which means any profit you earn off crypto transactions is subject to capital gains/losses or income tax.
If you hold a cryptocurrency in your digital wallet for more than a year, and you later decide to sell the cryptocurrency for a fiat currency (say the USD or CAD), the event will be subjected to a long-term capital gain tax.
However, if the cryptocurrency was in your wallet for less than a year, then a short-term capital gains tax will apply whenever you decide to sell the asset.
Unlike crypto trading, crypto mining (the practice of solving complex mathematical puzzles to authenticate crypto transactions) is subject to income tax. The income earned as a result of your cryptocurrency mining activities will be taxed by the tax authority.
Crypto tax events include but are not limited to the buying and selling of tokens. Cryptocurrency tax events also include trading cryptocurrencies for a profit. The IRS also considers crypto mining as a taxable event, since the profit earned is considered income.
To calculate your crypto tax liabilities, you will need the sale price, purchase price, as well as exchange fees. You need to maintain accurate records of your transactions to get accurate tax liability; otherwise, you may fall short of tax laws.
All taxpayers are expected to report all their cryptocurrency transactions (whether profit/loss) to the IRS each tax season. Failure to do so may trigger the eagle eye of the IRS. The IRS has trained tax agents spread across the country that will easily identify those refusing to report their taxes.
So, to ensure compliance with tax laws, it’s important that you maintain an accurate record of all your cryptocurrency transactions. The same also applies to flipping NFTs online.
Are There Any Requirements For Reporting Taxes?
The IRS treats cryptocurrencies as property, and like other financial instruments, any profit or losses incurred from crypto transactions are subjected to capital gains tax. You need to report your tax returns if you have been involved in any crypto transaction or received cryptocurrencies as income.
Importantly, each transaction should be reported in US dollars, as well as any gain or loss transaction.
The IRS requires that you report your taxes during tax season if you have been involved in cryptocurrency trading in the last financial year. Crypto taxes are reported using Schedule D and Form 8949 in the United States. Taxpayers are expected to use these forms to report their cryptocurrency transactions.
For crypto income, the IRS requires that you use Form 1040 to report all the income earned from crypto mining activities and other crypto businesses that can generate income.
During tax time, the following information is what you need to report your taxes:
- The type of cryptocurrencies
- The date and amount you purchased the cryptocurrencies
- Types of exchange
- The capital gains resulting from a crypto transaction.
- The fair market value of a coin as of the time you purchased the coin.
Before you file your crypto taxes, make sure you keep an accurate record of all taxable events, including but not limited to, your bank statements, invoices, and receipts. This is to ensure that you do not fall short of the tax law. If tax reporting is a cumbersome process for you, you can engage the services of a tax professional to report the taxes on your behalf.
It is important to note that failing to report cryptocurrency transactions or underreporting your income can result in penalties and interest. Therefore, it is recommended to consult with a tax professional who is knowledgeable about cryptocurrency taxation to ensure that you are reporting your taxes correctly.
Strategies To Reduce Your Tax Liability
The Income Tax Act makes it mandatory for taxpayers to pay capital gain/loss and income taxes for any profit or loss you incur in a crypto transaction. However, there are ways or strategies you can implement to minimize your exposure to these taxes. These strategies include:
- Tax-loss harvesting
- Using offshore accounts.
- donation of cryptocurrency
- Crypto “HODLing”
- Consider tax-efficient investment structures
Each of these strategies has its merits and consequences. You may want to do your due diligence before choosing a strategy.
Tax Considerations for Crypto Businesses
There are several tax consequences for those who own a crypto business. These include:
- Sales tax
- Payroll taxes
- Corporate taxes.
- Excise tax
- Deductions and credits
- Reporting requirements.
As a crypto business owner, the IRS requires that you report your taxes during tax time; otherwise, there are penalties you may face. At best, you can speak with a tax professional for guidance on how to comply with the tax laws in your country.
Conclusion
As cryptocurrency becomes mainstream, cryptocurrency taxation is now a subject that every crypto investor or trader should go through, otherwise, tax authorities may wield the big stick if you fall short of tax laws.
If you have ever invested or traded in cryptocurrencies, it’s important that you are aware of the tax consequences of cryptocurrencies, and this is exactly what we discussed today in this article.
You can use the knowledge you’ve gained from this post to set yourself apart and avoid tax penalties for not paying your tax liability.
Ultimately, you can use a crypto profit/loss calculator to ensure accuracy in your tax reporting; A crypto profit/loss calculator that’s designed to connect to your wallet or exchange, and pull all your transactions for tax reporting, all in one place.
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Thanks for going this far and reading my article all the way through! If you found this post inspiring and useful, share it with your friends, please! (Virtual high fives and hugs to all my sharers out there!)
Cheers,
Odeh Ahwal
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