Cryptocurrency keeps getting more popular. As more people buy and use these virtual currencies, the IRS has started to take them more seriously. If you’ve traded crypto this year, you’ll have to learn how to report that cryptocurrency on your taxes.
The number of people who own crypto in the U.S. has more than doubled between 2020 and 2021. That means many people will have to learn how to manage crypto taxes for the first time. Here’s how you can do that.
How Do Cryptocurrency Taxes Work?
First, you have to know how crypto taxes work. The IRS treats virtual currency as property, meaning it falls under capital gains tax rules. This works like traditional investments: you pay taxes on any profits from sales or rising values, and you can claim losses for falling values.
If you’ve held your crypto for less than a year, your regular income tax rate applies to it. If you’ve had it for more than a year, you’ll use capital gains tax rates, which are often lower than income taxes.
You’ll also have to pay taxes for things you’ve bought with crypto. These purchases count as a sale of that cryptocurrency, so you’ll owe sales tax as well as any capital gains if the coins’ value has increased since the sale.
If you mine cryptocurrency or receive it as payment for something, it counts as part of your regular income. If its value rises while you hold it, you’ll owe capital gains taxes on that profit as well.
How to Report Cryptocurrency on Taxes
Now that you know how the IRS taxes crypto, it’s time to learn how to report cryptocurrency on your taxes.
When you start to fill out your Form 1040, you’ll see a question asking if you’ve engaged in any virtual currency transactions. Answer this honestly, as not reporting when you should could result in penalties or even criminal charges.
Your crypto exchange may send you a 1099-B form detailing your transactions, which will help report them. However, it’s a good idea to keep detailed records yourself in case it doesn’t provide that form.
Next, find the forms you need to fill out. If you’ve just bought and sat on your crypto, you’ll report it on Schedule D like any other investment. You’ll use Form 8949 for crypto sales, including things you’ve bought with cryptocurrencies. If you’ve mined crypto, you’ll fill out Schedule C, where you may owe self-employment taxes unless you just mine as a hobby.
Since these forms and calculations can be confusing, you may want to hire a professional to help. Most tax professionals should be able to help you with crypto reporting today, and you can find crypto experts as well.
How to Minimize Your Cryptocurrency Taxes
When you report cryptocurrency on your taxes, you may be able to lower what you owe. Here’s how.
Holding crypto for a longer time will help save money since capital gains taxes are usually lower than income tax. If you sit on your crypto for a year or longer, you could pay just 15% or even less, potentially halving what you owe.
If any of your crypto has declined in value throughout the year, you can claim capital losses. These losses take away from your total owed amount, helping offset the cost of capital gains.
If you mine cryptocurrency and file it as a business under Schedule C, you can claim some business expenses. Things like your internet and electricity bills, computer hardware, and servers can all count as deductible expenses.
File Your Crypto Trades With Confidence
As tax season rolls around, your crypto transactions may seem to complicate things. However, if you know what to expect and follow these steps, you can file with confidence.
Crypto’s popularity is relatively new, so this tax landscape will likely shift over time. Keep an eye out for tax changes, record all of your crypto transactions, and report cryptocurrency on taxes as honestly and shrewdly as you can.
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