Tax season is finally here, and with it comes the possibility of more paperwork and stress. The IRS requires that crypto traders and businesses make a few important tax payments, including taxes on crypto-to-crypto transactions, crypto-to-fiat transactions, and taxes on gains. To help you understand how to pay these taxes, here are five tax tips for Bitcoin and crypto businesses.
1. Know the taxes for Bitcoin and Crypto traders
Before you can start making crypto-to-crypto transactions, you need to know the taxes for Bitcoin traders, and what taxes you’ll owe if you trade or invest in other currencies. Crypto-to-crypto transactions aren’t taxed like traditional currency transactions, but they may be taxed like capital gains.
The IRS treats crypto-to-crypto transactions as a type of exchange. This means that cryptocurrency traders, investors, and miners who buy and sell cryptocurrency receive ordinary income or capital gain when they trade or invest. This income must be reported, and any gains must be taxed.
2. Know the taxes for mining businesses
If you engage in cryptocurrency mining, you must pay the taxes for mining businesses. Mining is the process in which you use your hardware or application to verify and make additions to the blockchain. If you mine for Bitcoin, the rewards for these transactions are in Bitcoin. If you mine for Litecoin, the rewards for these transactions are in Litecoin.
However, these rewards aren’t taxed like traditional wages. Instead, you must report the profits as capital gains. The IRS doesn’t expect miners to report their income as wages, so it’s up to you to report your mining profits on your tax return.
3. Know the taxes for investors
Before you invest in a cryptocurrency, you must understand how taxes for traders and investors affect you. If you invest in Bitcoin, Bitcoin’s value fluctuates, so it’s difficult to predict how much value you’ll gain or lose. If you invest in a currency other than Bitcoin, the value of that currency may be more stable, but it fluctuates more.
These fluctuations in value are taxed differently than standard income. If you invest in Bitcoin, the gains you make are taxed as capital gains. If you invest in Litecoin, the gains you make are taxed as capital gains.
4. Know the taxes for Crypto-to-Fiat transactions
When you sell Bitcoin or other cryptocurrencies for fiat, you pay taxes for crypto-to-fiat transactions. When you sell Bitcoin for USD, you must report the profits as capital gains. If you sell other cryptocurrencies for USD, you must report the profits as capital gains.
5. Know the taxes for Crypto-to-Crypto transactions
When you trade Bitcoin, Litecoin, ETH, or any other cryptocurrency, you must report the profits as capital gains. These gains are taxed at ordinary income rates, and although the IRS doesn’t expect traders to report their cryptocurrency gains as wages, you must report your gains.
Conclusion
As Bitcoin and other cryptocurrencies become more popular, more people are seeking tax advice on how to file their taxes. If you are a small business owner and are selling virtual currencies, you will want to contact a tax professional for tax preparation and guidance.
Contact our experts at Abbo Tax CPA in San Diego, CA to learn more!
