Let’s talk about taxes.
Even though it’s early in the year 2020, April 15th is going to come around before you know it. It’s best to get things organized now and ready to file in case you discover forms are missing or other potential hindrances.
This year, don’t scramble to gather all of your tax information only to file your return in a rushed panic. Learn what you can do now and prepare as much as possible to make tax day a breeze.
Prepare for 2020 Tax Return Now
Taxes can get really tricky if you own any cryptocurrency. And this year, the IRS is really going to be looking to see if crypto investors are properly filing their investments. So how in the world does it get taxed? What should you fill out on your return? What if you do it wrong? Do you even need to pay taxes on cryptocurrency?
Before you fill out your IRS 8949 form to report your cryptocurrency gains and losses, there are a few things that you should keep in mind. Tax rules change every year and 2020 is no different. Prepare yourself for this year’s taxes and read up on what you need to know, especially about cryptocurrency.
We won’t be going over every single nitty-gritty detail about filling your cryptocurrency, however, if you have any questions that we don’t end up answering, the IRS website has a great FAQ page dedicated to questions about filing cryptocurrency.
Here are 3 things that are helpful to understand before filing your cryptocurrency tax return:
1. Understand the IRS Guidelines on Taxable Activities
You certainly don’t want to be taxed on something that doesn’t actually get taxed on. That’s why it’s important to understand what is labeled as a taxable activity.
When it comes to cryptocurrency, you can be taxed on exchanging cryptocurrency to fiat-trading crypto to crypto-paying for goods and services with crypto-earning cryptocurrency including mining, airdrops, and hard forks.
2. Miners May Be Eligible For Certain Deductions
Did you know?
If you’re a cryptominer, you can qualify for certain deductions.
Cryptominers are responsible for verifying certain transactions by using complex mathematical skills. Often, this requires having certain equipment and software programs that the cryptominers have to purchase. This equipment is actually tax-deductible for cryptominers.
Of course, running a computer system will increase your electric bill by quite a bit. In fact, according to Digiconomist, the amount of energy used around the world specifically for mining cryptocurrency is the same amount of energy consumed in Australia. So, because cryptomining uses up so much energy, you can deduct your electric bill that was used solely for cryptomining.
It’s possible that your equipment will need some repair, which means you may be eligible for a tax break. Depending on the cost of the repairs for your equipment, you could also deduct that from your taxes.
And finally, if you had to rent some space for your cryptomining, that could also be deducted from your taxes. You can also see if you are eligible to get a tax break from using your home as an office here.
3. Harvest Your Bitcoin Losses
So, the bad news is, you may have had some losses this year.
The good news is, you don’t get taxed on your crypto losses. So be sure to keep track of your losses because you’ll have to report them on the IRS 8949 form when you file your taxes this year. Reporting your cryptocurrency losses can minimize your tax liability which means you won’t have to pay as much in taxes when the time comes.
Cryptocurrency has had an unfortunate loss during the summer of 2019 and December. The best thing you can do if you’ve had a bad loss with your investment in cryptocurrency is to harvest your losses.
Investopedia explains that tax-loss harvesting is the process of selling your securities at a loss in order to offset a capital gains tax liability. So, harvesting your cryptocurrency allows you to minimize your tax liability and you only have to pay taxes on your gains.
If you’re not sure what your losses ended up being, you can take advantage of cryptocurrency tax software that is a great resource to help get your taxes in order for the upcoming year.
Filling your taxes can be a daunting task, especially when you have cryptocurrency to file. If it’s all feeling too overwhelming, don’t be afraid to have an agency or cryptocurrency tax software help you out. Just take it little by little and before you know it, you’ll be good to go to file your taxes correctly. Just don’t wait until the very last minute to file them; we know how that’s gone in the past years, and it’s not great.