Tax liabilities related to cryptocurrency can be complex and confusing for taxpayers, yet the IRS has made clear its approach: it treats cryptocurrency like property and requires reporting through a centralized exchange for referral bonuses, mining operations, staking activities and airdrops.
Cashing out cryptocurrency to USD is considered taxable and creates a capital gain, so it is vitally important that a tax accounting software tracks your cost basis and sales proceeds accurately.
Cost bases are used to determine any capital gains realized upon later disposing of assets, and are particularly essential when dealing with cryptocurrency as prices can change rapidly. Tracking your cost basis regularly in order to avoid overpaying for coins.
Tracking cost basis in the cryptoeconomy can be complicated due to assets moving among wallets and exchanges frequently. TaxBit customers have often experienced this difficulty when tracking cost basis across wallets and exchanges was more complex – this issue will become even more pertinent once 1099 legislation comes into play, likely with forms 1099-MISC and 1099-B being issued as required forms.
To calculate your cost basis, it’s necessary to know both the initial purchase price and transaction fees associated with each coin you have acquired. This information should be available via your blockchain; alternatively, cryptocurrency tax software makes this task much simpler by tracking transactions history and automatically calculating cost basis and sales proceeds, so you can file taxes confidently.
First in, first out (FIFO) is the most accurate way of assigning crypto assets a cost basis, as it compares the sale price against your earliest cost basis record. Although recommended by the IRS, other methods should also be considered when assigning cost bases for crypto investments.
Taxpayers who wish to reduce their taxes might be tempted to utilize a Last In, First Out (LIFO) strategy; however, this strategy can be risky and could put them in trouble with the IRS.
When selling or disposing of cryptocurrency, you are required to report any resulting capital gains or losses on IRS Form 8949. Your cost basis and fair market value of disposal are used to calculate these figures; any gains or losses derived will then be taxed accordingly – whether exchanged for fiat currency or another cryptocurrency. Staking rewards earned while mining will also require reporting.
Capital gains occur in the crypto world when selling or exchanging cryptocurrency for USD or another type of government-issued currency, usually at ordinary income rates that vary based on filing status and taxable income. Some transactions, however, do not incur taxes such as moving assets between wallets or exchanges that you own; it may be difficult for taxpayers to track these assets easily when reporting taxes.
No matter the complexity of crypto taxation, keeping accurate records can help ensure you pay only what is due. Your records should help establish your cost basis – the original purchase price of your asset – which is used to calculate any future capital gains or losses you incur. If you hold onto your cryptocurrency for more than 12 months it will qualify for long-term capital gains treatment at either 0%, 15%, or 20% depending on your filing status and taxable income.
Cashing out cryptocurrency (selling it for USD or another government-issued currency) is also subject to taxation, while swapping one coin for another even if both remain in your possession is considered a taxable event because essentially you are selling one coin in exchange for another creating capital gains taxation liabilities.
The IRS has made it abundantly clear that all taxable cryptocurrency transactions must be reported. They have begun mandating digital asset brokers file Form 1099-B on their customers – just like traditional financial brokerage firms do for traditional investment assets – making it easier for the IRS to track crypto trading activity.
Earned cryptocurrency via mining or staking is subject to income tax, including rewards earned from airdrops, hard forks and ETH staking fees. Although many of these rewards may seem inconsequential, they should still be reported. Thankfully, the IRS allows taxpayers to offset capital gains with capital losses for even greater tax savings.
Cryptocurrency dividends offer an innovative new way of earning returns from your crypto investments. While stocks pay dividends based on company profits, cryptocurrency dividends are determined by how much crypto you own – you can generate dividends through methods such as staking, liquidity providing, lending and airdrops to boost passive income and outperform most traders.
At first, these activities may seem complicated to track and tax. To simplify things, crypto accounting software offers an efficient solution by automatically calculating your cost basis and sales proceeds – including using various accounting methods like FIFO (first in, first out). Furthermore, it can assist with finding your cost basis if multiple transactions have taken place – providing an overview report for tax purposes.
When selling cryptocurrency, capital gains taxes could apply if you make a profit on its sale. This is due to how the IRS considers them assets instead of currencies; taxes on this difference between your purchase price and selling price can add up quickly; to reduce tax burden as much as possible it’s wiser to buy and sell in smaller increments.
Use a crypto trading bot that tracks costs and losses in real-time to reduce your tax burden, as this allows you to calculate tax implications of each trade and set profit targets automatically manage trading activity.
Cryptocurrencies often experience drastic price swings between when you purchased and current values of coins, so keeping accurate records of purchases, sales and disposals will make filing your taxes much simpler in the future.
In general, the IRS treats crypto gains as capital gains; the exact amount you owe depends on your tax bracket and whether other sources of income exist. Long-term capital gains tend to be taxed more favorably than short-term ones – however this doesn’t always apply with cryptocurrency assets, so make sure that you consult an accountant or tax professional regarding any specifics of your situation prior to selling any assets related to cryptocurrency.
Non-fungible tokens (NFTs)
Non-fungible tokens (NFTs) are digital identifiers created using smart contracts on Ethereum to represent ownership of real world or virtual items. NFTs can then be transferred between users using smart contracts. NFTs have the unique capability of recreating properties such as scarcity and ownership without needing a central authority to maintain these attributes. Their market has experienced rapid expansion, making this technology applicable in numerous applications across industries. Artists, for instance, can leverage NFTs to sell their work through an easily accessible global platform that offers various payment options and remains easy to use. Furthermore, content creators can utilize NFTs as a means of protecting ownership over intellectual property while simultaneously reducing piracy and monetizing content created using these tokens.
No matter if you are selling or using crypto as payment, all transactions involving it must be reported on your tax return. This includes earnings from mining, staking, hard forks and airdrops which the IRS considers ordinary income at your marginal tax rate. Furthermore, any crypto cash outs are also taxable under their first-in, first-out (FIFO) method which provides the most accurate cost basis calculation but may become complicated when trading multiple exchanges.
Use cryptocurrency tax software to automatically calculate the cost basis and sales proceeds of each transaction, helping you avoid costly errors that could incur penalties from the IRS. With their increased enforcement and auditing efforts against cryptocurrency users, it is now much simpler for them to monitor your activity; when transferring funds between wallets you’ll likely receive a 1099-MISC from any exchange you use.
On your annual tax return, it is imperative that all crypto trades be reported. This includes earnings from staking and mining as well as rewards from airdrops or hard forks; all transactions relating to cryptocurrency must be recorded as income using Form 8949 and reported accordingly. The IRS is particularly keen to identify taxpayers who fail to report these activities and may impose penalties for unreported cryptocurrency activities.