Cryptocurrency has been in the limelight for quite some time now. Bitcoin is the first formal implementation of blockchain technology. As a result, it has created waves in the finance and currency worlds by successfully sustaining a decentralized, yet secure digital money system.
In the United States, cryptocurrency is taxable as ‘property’ by the Internal Revenue Service. The IRS had issued a Notice 2014-21, that stated the same and a list of FAQs regarding taxable events in the U.S. Even though there’s still a lot of confusion regarding cryptocurrency and taxes, tax evasion is a serious crime. This can lead to IRS warning letters and audits, and you’ll end up paying hefty fines.
This article simplifies crypto taxes by demonstrating 3 simple ways in which you can deal with crypto taxes.
The IRS Virtual Currency Compliance Campaign
In 2019 the Internal Revenue Service (IRS) launched the Virtual Currency Compliance campaign. The aim of this campaign was to address non-compliance among cryptocurrency holders in order to ensure that taxpayers were aware that the IRS was keeping up with crypto events and closely monitoring every transaction in the system.
The tax collector, as part of the campaign, sent thousands of warning letters to customers in the same year, requesting some taxpayers to file updated tax returns to correct a difference with the agency’s data. It was discovered that several users, mainly traders who earned a fortune during the 2017 ICO craze, were unaware of their tax requirements and neglected to submit taxes. This was largely owing to the ambiguity of crypto taxation regulations in the United States.
Dealing with Cryptocurrency Taxes
One such warning letter sent by the IRS was Letter 6173, which requested users to answer within a month, and CP 2000, which informed taxpayers that their returns didn’t match the IRS’s records and listed the fault as well as the appropriate interest.
When a user has to file the amendment, they can challenge the total amount that they owe by providing supporting papers to back up their claim. This can be done manually or with the help of cryptocurrency tax software, like ZenLedger. The latter method is more convenient for saving time as well as maintaining accuracy.
But as mentioned earlier, cryptocurrencies are considered as ‘property’ in the United States. Here are three strategies to deal with bitcoin taxes to be on the right side of the crypto laws and avoid penalties:
1. Report All Crypto Transactions
Digital assets are securities. And this can easily make a trader believe that exchanging one for another is a tax-free event. The IRS, on the other hand, declares explicitly that these are all taxable events that must be reported yearly.
2. Using The Appropriate Tax Forms
You might be investing in crypto or trading crypto, mining crypto, or using it as a medium of exchange— whatever you do, each of these transactions requires a distinct filing form.
- If you have any transactions that can be classified as a capital gain or loss, you need Form 8949. You may fill this up using transaction reports that you can receive from exchanges.
- Form 1040 (Schedule D, Capital Gains, and Losses) is the summary of your capital gains and losses.
- If you have earned $600 or more in a tax year, you must record them in the Form 1099-MISC (Miscellaneous Income). Your rewards/fees revenue from staking, earning, and other similar programs must be reported here.
As a result, a user must be careful to fill out the relevant IRS form in order to accurately record the transaction and estimate the necessary tax.
3. Maintain Record Of Crypto Transactions
Given the SEC’s definition of cryptocurrency as a digital asset, it is crucial to maintain a record of your crypto transactions. Creating and keeping a record of all relevant transactions aids in creating its base. As a result, it’s easier to calculate profit or loss, which helps with tax deductions. Even though traders may do this manually, it is recommended that they use a professional crypto tax tool service, like ZenLedger to automate the process and keep everything organized.
The Bottom Line
Crypto taxes can indeed be very confusing, and new regulations make them all the more complicated. But not paying taxes can result in huge penalties as the IRS is tracking every crypto transaction.
Manual crypto tax reporting is possible, but it is time-consuming and resource-intensive. Active traders, investors, airdrop recipients, and DeFi enthusiasts, on the other hand, may find it confusing. As a result, employing a trustworthy and worldwide crypto tax tool may save time, money, and, most importantly, improve accuracy to avoid unnecessary differences.
FAQs
- Is Crypto Taxable in the U.S.?
In the United States, cryptocurrency is taxable as ‘property’ by the Internal Revenue Service. The IRS had issued a Notice 2014-21, that stated the same and a list of FAQs regarding taxable events in the U.S. Even though there’s still a lot of confusion regarding cryptocurrency and taxes, tax evasion is a serious crime. This can lead to IRS warning letters and audits, and you’ll end up paying hefty fines.
- What Is the Letter 6173?
The 6173 letter claims that the IRS already has information concerning non-compliance with tax and/or reporting laws and requests a prompt response.
- What Is a CP2000 IRS Letter?
When your tax returns do not match the income information they have, the Internal Revenue Service (IRS) issues you the CP2000 notice. The IRS CP2000 letter is a detailed estimate of taxes and possible penalties that may be incurred as a result of missing income information.
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