The taxing laws applied to cryptocurrency are still under development and there will most likely be more changes made soon. The Internal Revenue Service (IRS) made available, in 2014, a guide for digital assets taxing, and this has been the only legislation or guidance proposed so far. In today’s article, we will be presenting some interesting facts about cryptocurrency taxes.
Bitcoin Is Taxable Property
The IRS has classified Bitcoin as a property, which means it is subjected to taxing. This means that BTC holders or traders have to comply with all of the IRS rules governing cryptocurrency capital gains and losses because, if not, they can be subjected to bank account seizures, fines, penalties, and, in some extreme cases, criminal offences.
Taxes for Crypto-to-Crypto Trading
Bitcoin was somehow expected to be taxed, as it is the most used and valuable crypto on the market, but many were surprised to learn that trading was also not exempt from tax. The process of trading a cryptocurrency for another also incurs taxes, just like it would happen when you trade crypto for other properties. As the IRS views cryptos as assets, it doesn’t regard trading Bitcoin for Ether like exchanging dollars for euros, comparing it instead to trading shares of company stock for another company’s shares.
Crypto holders that receive new digital tokens which are generated from forks can also be subjected to paying taxes. The IRS states that “found” money is also taxed – in the world of taxing, it is known as the “treasure trove” principle.
For example, let’s say that you owned a certain amount of BTC and when the BCH forked occurred, you received the same amount of BCH without doing anything. In this case, the market value of your new owned BCH is classified as a “treasure trove” which has to be reported as income (regular income – no capital gain rates). This rule applies even if you didn’t sell your BCH.
Crypto Mining Taxing
If you mine cryptocurrency and make a profit out of it, it is considered a taxable event. According to various criteria stated by the IRS, such as how much effort you dedicate to the mining process, it can be considered as either self-employment or a hobby.
Both instances require that you include the income of the fair market value of the coins which have been resulted from a successful mining operation. This activity is considered ordinary income and the value of these coins is the price they had on the day you mined them.
If mining is categorized as a hobby, then look into line 21 (other income) and any expenses resulted from mining apply to schedule A (miscellaneous subject to 2% of AGI limitation). When mining is considered a business activity, schedule C is used for income and expenses.
There are advantages and disadvantages to both situations: the hobby income doesn’t incur a 15.3% self-employment tax, just the normal income tax, but you get less valuable deductions. Business income brings you more deductions, but you have to pay in addition to normal income tax an employee tax of about 15.3%.
099-B and 1099-K
Several crypto exchanges (Kraken, Gemini, Coinbase, etc.) will send you when it’s taxing season a Form 1099-K (Coinbase is currently pondering whether to send 1099-B forms instead of the 1099-K). These forms contain the sums in dollars of the trade transaction which are required to be submitted as income taxes. But if your crypto exchange does not give you any of these forms, you are still obligated to report every crypto transaction which you conducted in that tax year.
Digital Deliverance via Specialized Tax Preparation Services
If you are a trader that makes hundreds of crypto trades in a single tax year then the process of submitting the aforementioned forms can be quite overwhelming. The sums which are listed for both cost basis and net proceeds represent your transactions’ total amount in dollars.
Your crypto exchange or broker can provide these gross transaction totals, which then must be imported to your Form 8949 and Schedule D at tax time. However, you can avoid this hassle by soliciting the help of accounting firms which are specialized in crypto tax preparations. It will cost you, but it will also spare you the headache of having to do your own tax returns.
Those of you that are more tech inclined can purchase or lease software for crypto tax prep and let it calculate the numbers and complete the forms for you. You can also apply the same convenient approach when you calculate your annual crypto capital gains tax returns.
Like in most cases with assets, there is an exception that can rid you of paying taxes. By donating your crypto to charity (only to the one which is recognized by the IRS; like a 501(c)(3) organization), you will not be obligated to report any capital gains on the transaction or pay anything to the IRS.
Also, the value of your donation will receive a deduction on the same date it occurred. If the spirit of Christmas has overwhelmed you and you’re feeling charitable, you can make a large donation by giving crypto, which will not only help the cause that you’re donating, but it will also bring you a big unrealized/untaxed gain.
There are still many rules which the IRS applies to various situations involving crypto, and there will be more to come as the market grows. For the time being, consult their website and take all the necessary measures in due time.