If you operate a business that works with cryptocurrency, you may have to pay tax on it. There are certain things you need to be aware of to stay on the good side of the law, especially if your business is based in the United States. This blog post will walk you through the basics of cryptocurrency taxes.
Crypto tax basics
The Internal Revenue Service (IRS) has weighed in on how to classify cryptocurrency for tax purposes. The agency has issued a notice stating that digital currency should be treated as property for federal tax purposes.
The agency considers it to be property, not currency, and it is, therefore, subject to the same taxes as other property transactions. This means that if you trade one cryptocurrency for another, you have a taxable event. If you buy or sell a cryptocurrency for fiat currency (like dollars), it’s also considered a taxable event.
How to report taxes for cryptocurrency
You need to keep track of each transaction that you make with cryptocurrency, whether it’s buying or selling it or using it as part of a payment transaction.
When you sell cryptocurrency for cash or other assets, then this is considered a capital gain and should be reported on Schedule D as such (with Form 8949). You can also use Form 8949 if you have losses from selling cryptocurrencies, but only if they are offset by gains elsewhere on the form.
Capital gains tax on cryptocurrency
Capital gains tax applies to gains arising from the sale of assets that have been held for more than one year (short-term capital gains). The rates for capital gains taxes are 0%, 15%, or 20% depending on your income and marital status.
If you sell bitcoin or other cryptocurrencies for less than you paid for them, then this is a capital loss and can be offset against future capital gains. If you sell bitcoin or other cryptocurrencies for more than you paid for them, then this is a capital gain and has to be reported on your tax return.
What about mining cryptocurrencies?
Mining cryptocurrencies can be an excellent way to generate passive income and build wealth. However, many miners don’t realize that they need to report their income to the IRS every year — just like any other business owner who earns income through their cryptocurrency activity. If you mine more than $400 worth of Bitcoin in any given year, you must report this as self-employment income in Schedule C of Form 1040.
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