How Cryptocurrency Sales and Exchanges Affect Your Taxes


– How Cryptocurrency Sales and Exchanges Affect Your Taxes. Once a curiosity among the tech savvy, cryptocurrency has evolved
into a hot-button issue for financial professionals, regulators, and people seeking alternatives
to traditional currency. Bitcoins and other virtual
currencies are now used to pay for anything from a cup of coffee to institutional purchases,
like lab equipment, with the help of exchanges
and digital wallets. But whether you’re trading
in Bitcoin, Ethereum, or any altcoin of your choice, cryptocurrency transactions
have tax impacts. This is especially true if
you’ve been holding them in the hope their value will increase. When do you have to report
crypto-transactions? Contrary to popular belief,
you do need to report cryptocurrency sales and
exchanges on your tax return. It doesn’t matter if you’re
on a private blockchain or using a coin that has
enhanced privacy features, like Dash or Monero. If your cryptocurrency of choice drastically appreciates
in value after purchase, your taxes won’t be
affected until you sell if, even if you trade one coin
for another denomination. Buying something with your coins or tokens is also a taxable event. You don’t have to report when you make your initial actual purchase, but you should keep good records of how much you paid and
how much it sold for. You then report the sale in the appropriate year’s tax return. Happy Tax has also
developed cryptotaxprep.com to help traders with the
accounting of their transactions and year-end tax preparation. The service includes tax planning to minimize any tax liability. This type of recordkeeping
is extremely important, since, unlike most brokered securities, this information isn’t automatically recorded and reported to the IRS, referred to as a covered transaction, while basis that isn’t
recorded by the broker, then recorded, is called
a non-covered transaction. Coinbase recently lost
there battle against the IRS to have over 14,000 user
accounts investigated for failure to report crypto
exchanges in their past, which may result in onerous penalties and interest for those that didn’t report their crypto-transactions and profits. The IRS is using the
same strategy they use to stop tax evasion with Swiss banks, and the other exchanges
in cryptocurrency owners will definitely be next. So, make sure to report those sales. Cryptocurrency and capital gains tax: The IRS characterizes cryptocurrency based on your intent with it. If you received cryptocurrency payments in a trade or business,
being paid for your services, or receiving it for sales
of creative work like music, you’d have to recognize it as income and convert the
cryptocurrency amount to cash based on what is worth on the sale date. However, if you’re trading cryptocurrency similarly to stocks or other securities, then the capital gains
and loses characterization and rules would apply. Cryptocurrency mining is also taxable and classified as self-employment income. If you profit from the sale
of your virtual currency then you’d have to take
note of your basis, what you paid, the date of purchase, date of sale, and your proceeds. If you held it longer than a year, it’s a long-term gain, which has more preferential
treatment than short-term, held less than a year. Since lower income earners
in the bottom 2 tax brackets pay zero percent capital gains, this has made cryptocurrency
an attractive option when it hits peaks; and early
adopters didn’t pay much for the first few issuances
of Bitcoin and Ethereum. Short-term capital gains are taxed at a higher ordinary income tax-rate. So any transactions of coin
that weren’t held for a year will cost you more in taxes. Some traders are under the impression that crypto-trades only become taxable if you withdraw your coins to
your bank account in fiat USD. This is not the case. Even money that stays in
an exchange after a sale or is swapped for another coin via a service like Shapeshift, are taxable events and
need to be reported. If you sold at a loss during
some of the volatility often experienced in the market, or any other time, for that matter, you can deduct up to $3,000
per year in capital loses until that lose has been used up. Harvesting loses is an effective
way to cut your tax bill if you’re concerned about being pushed into a higher bracket, as far as your other assets are concerned. It definitely can be a good idea to sell off any cryptocurrency
that lost value, and if you’re hesitant to keep holding it, and you have capital gains to offset it against as a year-end
tax-planning maneuver. Whether the IRS will eventually
change the classification of cryptocurrency is yet to be determined. But no matter what classification it gets, you’ll definitely need to report your cryptocurrency transactions, and keep good records of
how much your coin of choice was worth the day you bought, and then what it was when you sold it.

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