The 2020 tax season kicked off on Jan. 27, and it is due to close by April 15, so it is high time you got cracking on filing your personal returns. The earlier you do it, the better, as the IRS expects more than 150 million Americans to do so, and you don’t want to get caught up in a last-minute rush. Practically everything you need to accomplish this is on the IRS website, but if you get stuck, you can always get help.
People with disabilities, those who are not fluent in English, or who make less than $56,000 annually, can seek assistance from the VITA (Volunteer Income Tax Assistance) program. Such free assistance is also available to anyone over 60 years of age through the Tax Counseling for the Elderly (TCE) program. IRS-certified volunteers offer both these kinds of aid.
If you have been dabbling in cryptocurrencies, you also have a tax obligation to the state. A raft of legislative measures have, and still are, being put in place to ensure profits generated from cryptocurrency trading is taxed. There is a procedure in place to submit these returns, which the IRS monitors tightly.
What are Cryptocurrency Taxes?
Virtually anywhere in the world, you are required to pay taxes if you make money from some enterprise. People make money from cryptocurrencies mainly in the below ways:
- Speculation:As folks do with land or houses, you can buy cryptocurrency, wait for it to appreciate in value, then sell it. In this way, you make money when you cash out, but you can still make money even before you sell. You can invest directly in cryptocurrency or in companies that work with cryptocurrency, click here to learn more about one such way to invest. You can receive dividends from a cryptocurrency as you hold it just the way you do if you have shares in a company. If you’ve heard of the term ‘staking’ as regards cryptocurrencies, this is what it means.
- Mining: Miners in the cryptocurrency world are third parties who validate transactions on behalf of other cryptocurrency users. A group of such transactions is known as a chain.
You are required by law to report any income from such activities in your tax returns. Unlike in the formative days of cryptocurrencies, the IRS has set up procedures for doing this. Every sale or trade of cryptocurrency gets recorded in the standard Form 8949 alongside any loss or gain made from the transaction. Profits are considered taxable income. You are also required to pay cryptocurrency taxes whenever you get paid in cryptocurrency in exchange for goods or services.
How to calculate capital gains and losses?
What people mean when they refer to it as “cryptocurrency tax” is essentially just a capital gains tax, since cryptocurrency is considered an asset, like tangible property. The higher your capital gains are, the higher the tax you pay. For this reason, if you mainly make your income from speculation, you might want to cash in as soon as the price goes up. If you wait a little longer to sell, you may still make a profit while falling in a lower tax bracket.
Getting your actual capital gains or losses will require you to get the fair market value and the cost basis of your asset, cryptocurrency, in this case. The difference between the two will be your capital gain or loss. The fair market value will be the value of your cryptocurrency at the moment you sold or traded it while the cost basis will encompass its buying price and the transaction fees of the purchase.
What is not a taxable event?
There are some instances involving cryptocurrency transactions that the IRS considers not to be taxable. These include:
- Moving cryptocurrency from one wallet to another
- Giving to a charity in the form of cryptocurrency
- Purchasing cryptocurrency with fiat money
- Giving cryptocurrency to someone else as a gift
How to file cryptocurrency taxes?
As mentioned earlier, you will need to enumerate all your cryptocurrency activity in the Form 8494. Next, you will need to transfer this information to the Form 1040 using the Schedule D. Gains from mining will need to be captured as self-employment income.
Do your duty…
Now that cryptocurrencies transactions have become transparent, the IRS can more easily monitor activity in this sector to ensure income from trade does not go untaxed. You’re therefore well advised to do your duty and determine how much you owe in cryptocurrency tax and give Caesar his due. Take advantage of the help IRS offers, and if filing these returns still proves a challenge, reach out to one of the many tax consultants available.