As time goes by and institutions and authorities are becoming more and more aware of the existence of cryptocurrencies, they are including more regulations, to gain more control over the transactions. But, that’s not possible, because it will ruin the whole concept of the crypto world. On the other hand, crypto investments are considered taxable actions, and if you are doing that, you need to align your activities with the laws in your country. If you still don’t do anything related to cryptocurrencies, but you are interested and you explore your options, don’t forget to check on this one, to prevent unpleasant situations and law issues in the future.
Also, you need to know these general things about taxes, especially if you live in the USA:
- You will have to report the gains, which means if you sold some part of your crypto belongings, or exchanged them, or even used them to buy something, you must put that in your tax file.
- If the cryptocurrencies lost their value and the prices dropped at the time you spent them, you can deduct your losses. Also, you can deduct the tax amount if you used the crypto money for charities or nonprofit organizations.
When it comes to trading, you also have to report it as a taxable event. Crypto taxes are regulated in 2014, by IRS, and they are treated mostly as capital assets, which are taxable assets when they are sold for a profit. For example, if you bought a Bitcoin when it was cheap, and held it in your wallet until it reached a bigger price, and then you spend an equal value of the initial price, now you have a profit that is equal to the new price, minus the amount spent. So, practically, you are gaining goods. Also, capital losses must be mentioned in the file too, because there are some easing conditions that apply in that case.
But, in order to be able to do that, you have to keep track of every activity on the market. Apps like the profit-maximizer.app will help you save all the insights in your activities, but you need to always keep a journal of every step you take. In general, you will need Form 1040 for a federal annual tax return, and fill up the gaps with the information needed. In some cases, you will have to additionally use other forms, and that’s why you maybe have to work with a professional accountant the first time.
If you live outside the USA, different rules and laws apply to your crypto profits, and if you are seriously into that, you will have to check the policies before you file the taxes. In some countries, they are automatically calculated based on the amount you spend in fiat currencies, or they are added to the product or service price, and you pay while you shop.
What type of income is mining?
According to the USA policies, crypto mining is an ordinary income, and it’s taxed like that. In this case, you need to include them in the income, not as a capital gain or profit. Also, if you receive payments in cryptocurrencies, you have to report it as an income too, and you use the rate on the day you received the payment, no matter how things have changed since then.
In some cases, the exchanges report the taxes to IRS, but you need to confirm them in your form too. Some of the apps or platforms you use will generate a report you can use when filing the form, but also you can find some additional tools to help you with that. But we still suggest you work with an accountant the first time you report your tax returns, so you can be sure you won’t make any mistake that will cost you a lot of time and money later.
Planning ahead will ease your job
Every activity on the crypto market is considered a taxable event but under different conditions. You have to plan these things ahead before you take any step. You also have to search which apps can be the best to track your activity and help you with reporting. Sometimes, some of the calculations should be performed by hand, but that’s normal, so you can get to the real values.
So, if you know that you will invest in crypto money sooner or later, you should get ready for the taxes at the very same moment.
How to make a difference between similar, but still different crypto terms?
Sometimes, the choice of words can make a huge mess, but here we are to ease these things for you.
- If you own the cryptocurrencies for less than a year, they are short-term capital gains and you need to include them in your normal income tax rate.
- If you have had them for years, they are long-term capital gains and different rules apply.
- If you mine the cryptocurrencies by using your equipment, you should calculate taxes for the entire amount of coins you got.
- If you sell them to make profits, they are taxed as stocks and mutual funds.
- If you used to exchange, you only own taxes for the eventual gain you got through the exchanging process.
- If you received them as a payment for good or service, they are also counted as an income tax value.
So, probably now you see the need for a professional accountant who will help you make sense and recognize the perks. It’s very easy to make a mistake, especially if you had plenty of transactions in the last year.
Filing tax reports and returns works the same for cryptocurrencies and fiat money. You only need to make a difference between the income and capital gain. But, for the rest of the process, it’s all the same. Be a responsible citizen and do these things on time, before you face some law issues because no matter how complicated it seems now, it saves a lot of nerves in the future.