Virtual currencies, digital representation of value, have remained unregulated for many years. Since these transactions occur online, a large number of taxpayers have bought and traded crypto without worrying about whether this type of income is taxable. As a result of this, the tax gap has expanded by a huge margin. The IRS has taken notice of the rising crypto market and has issued guidance on the taxation of virtual currency transactions. If you too invest in the crypto market, you should stay informed about how you need to report this income to the IRS.
The US government now appears quite determined to crack down on taxpayers who may be involved in tax cheats by parking a lot of cash in the form of virtual currencies. If you trade crypto or any other virtual currency, you should be prepared to carry out the dealings as per the IRS guidelines.
Initially, the directions by the IRS in regard to reporting virtual currency transactions were not very clear. In the tax year 2019, the IRS put up a question for taxpayers: Did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
Since the question lacked clarity, it made reporting crypto difficult for taxpayers in many senses. The question was listed on Form Schedule 1. This form is not used to report income such as capital gains or gambling winnings. That is why not every taxpayer files this specific type of information.
Therefore, in tax year 2020, the IRS added this question to Form 1040 and made its intentions very clear.
If you deal in virtual currencies such as crypto and Bitcoin, you should know that these transactions are now taxable. As per the IRS guidelines, your virtual currency holdings will be treated as “property”. This makes it clear that your virtual currencies will be taxed just like other assets. So, if you buy and sell crypto or Bitcoin, you should know how to correctly report this to the IRS.
If you buy and trade virtual currencies, reporting this information in your tax return is not difficult. However, things can get complicated depending on how active you are in these types of digital transactions. So, it is better to prepare yourself and plan ahead to avoid any kind of future discrepancies.
If you have bought crypto with US dollars and transferred it to your personal wallet, the activity does not come under the purview of taxation actually. As per IRS guidance on Form 1040, simply purchasing virtual currencies with US dollars is something that you don’t need to report to the IRS.
You’ll come under the crypto tax net as soon as you start to sell your crypto or exchange it with other virtual currencies.
Suppose, you have purchased crypto and then used this virtual currency to pay for certain goods and services. This transaction is taxable. While simply buying crypto is not taxable, selling that crypto or using it to reinvest definitely is. If you buy and sell a lot of virtual currencies, you need to keep in mind that this transaction information needs to be reported to the IRS.
The IRS treats virtual currencies such as crypto or bitcoin as assets. This means taxes will apply like they do in the case of assets like stock or gold. So, the taxable value is determined on how much the value of your virtual currency holdings gain or lose during a specific time period.
The capital gain or loss is the difference between the amount you invested when you purchased a virtual currency and the amount you earn when you sell the virtual currency is termed as the capital gain or capital loss. This is the information that the IRS wants you to report in your tax return filing. So, if you purchase one bitcoin for $1000 and sell it for $5000, you would face a taxable capital gain of $4000. If your bitcoin depreciates in its value during that period, you will have a capital loss. Though this is a very simple concept to understand, the term ‘taxable event’ constitutes many more things than what you may think. When talking about capital gains, there are things such as long-term capital gains and short-term gains as well.
Therefore, the crypto tax rate will be affected by the amount of time for which you owned a virtual currency as well as your overall taxable income. Only a tax professional can provide more clarity on this.
If you deal in virtual currencies, the most crucial thing you need to remember is to keep track of all your transactions.
Typically, you need to track the time when you buy or receive, sell or exchange your virtual currency for another. In addition to this, you also need to record the fair market value of your virtual currency. This is exactly where this thing becomes tricky. After all, it is your responsibility to track all those activities that are considered taxable as per the new guidance issued by the IRS. While it is easy to jump on to the crypto currency wagon, tracking all activities is daunting.
To keep your virtual currency tax filing on the right track, it is important to plan ahead of time. If you have just started dealing in crypto and have only a couple of transactions to track, it will be easy. But if you are someone who frequently buys and sells crypto, bitcoin and other virtual currencies, you will have lots of potentially taxable activities to keep track of. For such people, it is advisable to seek the help of a tax professional or tax preparation agency to effectively do the tax planning as well as work out tax-saving strategies to reduce tax bills.
At SCL Tax Services In & Near Bronx, NY, we have a small team of highly competent tax experts with capabilities of a large tax firm. Located in the Bronx, NY, we offer services tax filing, tax preparation, tax resolution, tax refund, etc. If you have a question in regard to taxation of virtual currencies or want us to help you with your crypto-related tax filing, give us a phone call or send us an email.
We have helped the residents in and near the Bronx, Mount Vernon, Eastchester, Westchester, and Yonkers in New York over 15 years.
We are here to relieve you of the tax pressure by offering a wide range of Tax Services In & Near Bronx, NY. If you need expert advice or need us to complete your taxes, we will provide it for you. We know you work hard, so we work hard to serve your needs.Your time is valuable, which is why we are here for you.