The popularity of crypto-currencies is on the surge these days. Although these have been around the corner for just few years, the global commerce has witnessed the uncontrolled dissemination of cryptocurrencies. This phenomenon has propelled the government to come up with taxpaying guidelines.
If you are a crypto dealer, then the term of “taxation” might scare you to death. But IRS is not going to loosen its grip over crypto taxes any time soon. Rather, growing trend of digital currencies will make the government remain vigilant in tax imposition and collection.
A new entrant into the universe of crypto currency might find the procedures entailed in tax filing extremely cumbersome. It is often observed that hassles of these procedural requirements deter the traders from paying taxes. In order to provide you a sigh of relief, I have brought before you this article a comprehensive guidance to common tax complications.
Know about kinds of gains
For analyzing your tax situation, first you need to understand what kind of tax you will be subject to. Since crypto currencies are seen as capital assets, taxes imposed on these are capital gains taxes. However there are two variants of it. On holding digital currencies for more than a year, you are required to pay the long term capital gains taxes. One the other hand, holding currencies for less than or equal to a year, you will be subject to short-term gains.
This is the very basic concept that you must have a knowledge in. gains and losses incurred on multiple sells all throughout the year have to be reported separately. However, these all get clubbed together while determining the effect of trade on the income.
Trading crypto with another crypto
The income you are generating by trading one crypto with another is very much a taxable transaction and you are required to pay crypto tax on it. This is because the IRS perceives crypto trading as an equivalent to stock trading. Let us understand with an instance how your digital currency trading situation is viewed by the government.
Assume you are buying bitcoins with ripple, the first phase for it is cash selling the bitcoins amount that has been traded in exchange of ripple. The second phase is calculation of capital losses and gains on bitcoins on the basis of purchasing price and the sold price. The third and the final phase entails purchasing a fresh investment that is ripple with the original value same as the bitcoin worth when they were exchanged. Therefore, if the ripple value goes down after the exchange has been made you are still liable to pay tax on bitcoin profit.
Exchanging crypto with other product and services
Trading of crypto with products and services will invite a tax situation for you. You can purchase crypto for cash and used the same cash for buying a four wheeler and you will be still recognized as the seller of that crypto currency. While you are dealing in these kinds of transactions, always make sure that you have a ready access to zenledger – a Digital crypto tax software. It will assist you in keeping record of your past and present digital transactions. However, there is an exception for this particular rule provided by the IRS guidelines. In case you donate crypto currencies to a charity, you are not needed to report or pay capital gain tax on it.
Activities of crypto currency mining
If you are a professional miner in the field of digital currencies, then you are subject to crypto currency taxes. Even if you are just a beginner and presently pursuing mining just as a hobby, the rule remains the same for you. Both the genres of miners have to add the agreeable selling price to their incomes from successfully mined coins. Schedule C of IRS guidelines illustrate expense and income clauses pertaining to mining as a business activity. However, if you treat mining as a hobby and further supported by the eligibility fulfillment, then the associated expenses are added in Schedule A.
Both the approaches are a sort of mixed blessing for the miners. For an instance, the hobby earning gets lesser income deductions yet it is free from the self-employment tax payment. Whereas, deductions for business earnings are more but necessitates you for paying the self-employment tax.
Importance of record keeping
People often have this question on their minds that “Do I have to report all my crypto transactions?” Or “how much reporting will save me from bearing the brunt of the IRS audit?” Our suggestion to you is to be as transparent as possible with your digital dealings. Non-reporting may go unnoticed today, but its resurfacing in the future can get you in trouble.
. It will do the receipt compilation job and automates tax filing job for you. Apart from document consolidation, its serves the purpose of paying the right tax amount and eliminates every scope of underpayment or overpayment.Your tax situation is quite similar to a stock trader. Since they have been through this for years now, the tax complications have become trivial for them.
Income generated from crypto dealings is taxable in maximum cases. Every transaction you make comes under the watchful eyes of the IRS. After you are done mentally preparing yourself for embracing the harsh reality, resort to crypto tax calculating application.…