Cryptocurrency investors should be aware that IRS treats cryptocurrencies as assets for calculating taxes. Whether Bitcoin, Ethereum, or any other coin or currency, all cryptocurrency investments are subject to tax that investors must pay. Like you have to pay taxes for other assets like gold or stocks, in the same way, you must pay taxes on cryptocurrency. Owners of cryptocurrencies must be aware of the tax burden they have to bear for their crypto holdings by understanding the way IRS taxes digital assets.
Trading in cryptocurrencies through online crypto exchanges has similarities to trading in shares, and you must account for the transactions in your tax returns. As the tax season starts in January, you must pay taxes on cryptocurrency by calculating the gains made from the investments. However, losses also have been relatively high during 2021 when cryptocurrency prices experienced wild and intermittent swings.
Besides knowing how to pay taxes on cryptocurrency, you should also know when you owe taxes on cryptocurrency.
When should you pay taxes on cryptocurrency?
As IRS treats virtual currencies as assets, you must calculate the taxable value of your assets based on the gains or losses accrued due to appreciation or depreciation over a period. When you pay for some purchases in cryptocurrency or trade-in cryptocurrencies, it involves asset transactions that attract taxes. IRS considers that you are spending an asset to get another asset or something else; hence the transaction is taxable.
To understand how taxes on cryptocurrency work, calculate the capital gain or loss during crypto trades by finding the difference in the values of the currency when you had purchased or received it and the value recovered from its sale. You should report the figure in the tax return. While you need to pay taxes for the capital gains, individual filers can deduct up to $3,000 in their tax returns if you report capital loss during crypto transactions.
The holding time matters
To calculate a capital gain, you must consider the holding period of cryptocurrencies. If you buy and sell any cryptocurrency within the year, the transaction qualifies for short-term capital gains. If the holding period exceeds one year, it becomes long-term capital gains. The tax rate varies according to your overall income, and short-term capital gains are treated as ordinary income for the year 2022.
Reporting crypto income
If you get cryptocurrency as payment for some services, you must also record the value in USD and report the income in your income tax return. You must record the value of the cryptocurrency when receiving it and show it as your income. The IRS wants you to calculate the fair value in the cryptocurrency market when calculating your total income to compute the taxes payable.
For computing your liability of income tax, tracking all your cryptocurrency-related activities is critical by reporting the gain or loss from crypto transactions.
