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Cryptocurrencies and taxation

For the first time, this year the federal tax forms ask about your Bitcoin and other cryptocurrency activities. Here is all you need to know about cryptocurrencies and taxation. IRS argues that cryptocurrency is a digital currency or a digital representation of value.

Even though cryptocurrency is just like any other asset class, most people find it very complex and avoid filing. Unfortunately, most people think of cryptocurrencies as a way of moving money illegally and avoid taxes completely. But with the digital coins becoming more mainstream and the IRS shifting its focus towards them, it is becoming increasingly important to pay cryptocurrency taxes. Keep the following things in mind and your cryptocurrency taxation will be a lot easier.

All crypto traders are taxable

It is your responsibility to report gains and losses on all individual trades to the IRS. Be it exchanging a cryptocurrency to another or converting it back to your traditional currency (Specifically the USD) or spending cryptocurrency are taxable events.

The IRS is increasingly becoming focused on crypto taxes.

Did you know that avoiding paying your cryptocurrency taxes, is treated like any other type of tax fraud and can result in a maximum sentence of five years in prison or a fine of up to $250,000? Between 2013 and 2015 less than 900 people file their cryptocurrency taxes, however, and for some reason, this has caused the IRS to focus more on digital currencies.

Types of cryptocurrency taxes


Capital gain tax – According to the IRS guidance on Virtual currencies, cryptocurrency is the property and not currency hence you have to pay. There are two types of capital gains taxes:
Long term capital gains
It means that you held currency for over a year before selling or trading it.
Short term capital gains
Applies to cryptocurrencies that you have had for less than a year.

Income tax – crypto can also be subject to an income tax. This especially applies when you have been paid in cryptocurrency by an employer and your coins count as earnings. You pay the same amount in crypto income tax as you would in USD. Overall, employees and employers have to report cryptocurrency earnings and withholdings, respectively, as they would with USD.

Crypto taxes typically require two tax forms

The majority of crypto holders are huge investors, they use Sales and Other Dispositions of Capital Assets Form 8948 to report on digital trades. The investor describes their asset trades and gains.
The other form is Form 1040 schedule D which covers your total short-term and long-term gains and losses.

Cryptocurrencies miners are subjected to taxation

Mining qualifies as self-employment which requires a self-employment tax that is typically around 15.3%, you can deduct expenses such as electricity. Miners also have to pay taxes on their earnings.

Not everything crypto-related is taxed

You are not taxed for just buying and holding the cryptocurrency, you have to trade it to be subject to taxes. There is also speculation that cryptocurrency tokens are not subject to taxes since they are merely representations of the coin.

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