Over 10,000 cryptocurrency owners have recently received letters from the IRS regarding potential tax evasion or failure to report income and pay taxes on virtual investments such as Bitcoin or other cryptocurrencies.
When they initially invested in cryptocurrencies like Bitcoin, there may be some cryptocurrency investors who are unaware of the tax implications associated with it.
How Is Bitcoin Taxed?
The taxation of cryptocurrency by the IRS is akin to the treatment of property for reporting purposes, as any sale or exchange of tokens is considered a taxable occurrence.
According to CNBC:
The majority of trades are classified as short-term capital gains, subject to potential taxes of up to 39% depending on one’s income bracket. In contrast, individuals who retain ownership of bitcoin for over a year and subsequently sell it are exclusively accountable for a long-term capital gains tax, which is imposed at a considerably lower range of 15% to 23.8%.
Is there a way to reduce or eliminate crypto taxes?
Unless it is held in an IRA, any profit or loss arising from the sale or exchange of virtual currency is subject to either short-term or long-term capital gains tax, similar to stocks or bonds.
Unless rules and regulations are violated, IRA funds will either be tax-free or tax-deferred, depending on the type of self-directed account chosen for investment.
Assets held in an IRA do not incur capital gains taxes, whether they are short-term or long-term. Furthermore, if cryptocurrency is kept within an IRA, there is no requirement to monitor individual transactions for tax purposes.
Equity Trust offers a Digital Asset Platform that allows investors with a self-directed Traditional IRA or a self-directed Roth IRA to invest in various popular coins such as Bitcoin and Ethereum, all while enjoying the tax advantages of their accounts.
Did you receive a letter from the IRS if you were one of the 10,000 cryptocurrency owners?
It is advisable to consult a tax professional for tax advice. Additionally, exploring the option of holding your cryptocurrency in a self-directed IRA could potentially provide tax benefits by either reducing or postponing taxes on your coins.
What is the difference between long-term and short-term capital gains?
Assets that are held for more than 12 months are subject to long-term capital gains.
Investments that are bought and sold within a time period of less than 12 months are subject to short-term capital gains.
In general, long-term capital gains are subject to lower taxes compared to short-term capital gains.
How much is cryptocurrency taxed?
The amount and percentage of tax you owe on your crypto income will be determined by your personal income tax bracket and the duration you held your crypto assets (short term or long term). This tax liability varies for each investor and can be influenced by conventional income sources like stocks, job earnings, and other investments.
When do you owe taxes on your crypto?
When you earn or dispose of cryptocurrency, it results in a taxable event.
When do you owe capital gains tax on cryptocurrency?
If you sell cryptocurrency, the capital gain or loss you will experience will depend on the fluctuation in the price of your crypto since you first acquired it.
Included in the disposals are:
- Selling your cryptocurrency
- Trading your cryptocurrency for another crypto
- Using your cryptocurrency to make a purchase
When do you owe income tax on cryptocurrency?
If you receive cryptocurrency as earnings, you will be required to report income in accordance with the fair market value of the crypto at the moment of acquisition.
Included in the earning events are:
- Mining rewards
- Airdrop rewards
- Staking rewards
Tax-free cryptocurrency transactions
There are certain cryptocurrency transactions that are exempt from taxation. You won’t incur any tax liabilities when you:
- Hold cryptocurrency
- Buy cryptocurrency with fiat currency and hold it
- Transfer crypto from one wallet you own to another wallet you own
- Use cryptocurrency as collateral for a loan
Can the IRS track your cryptocurrency?
Contrary to popular belief, the assumed ease of evading taxes due to the anonymity of cryptocurrency is actually false.
The IRS receives 1099 forms from major exchanges such as Coinbase, these forms include your details and records of your cryptocurrency earnings.
In order to combat tax fraud, the IRS has collaborated with contractors like Chainalysis to analyze the blockchain and detect anonymous wallets by utilizing information received from major exchanges.
The IRS will possess additional information in the future to detect tax evaders, thanks to the stringent reporting obligations imposed on U.S. exchanges as per the 2021 infrastructure bill.
What happens if you don’t report your crypto taxes?
Tax fraud can result in various penalties imposed by the IRS, such as criminal charges, imprisonment for up to five years, and a maximum fine of $250,000.
In recent years, the IRS has adopted a proactive approach towards addressing concerns related to tax compliance in the cryptocurrency sector. As part of its efforts, the main US income tax form (1040) now incorporates a mandatory question that all American taxpayers are required to truthfully respond to, as per the consequences of perjury.
Did you, at any point in 2022, (a) receive any form of compensation or payment in the form of a reward, award, or for property or services rendered? Or (b) engage in any transactions involving a digital asset (or financial interest in a digital asset) such as selling, exchanging, gifting, or disposing of it?
As the adoption of cryptocurrency picks up speed, there is a high possibility of witnessing a rise in cryptocurrency tax audits and prosecutions.
What if you forgot to report your crypto taxes?
If you belong to the majority of crypto investors, it is highly likely that you were not initially aware of the requirement to report your crypto-related income on tax filings.
There’s no need to worry if you find yourself in this situation as you have the option to include your crypto-related income in a previous year’s tax return using IRS Form 1040X.
Amending your return in good faith is preferable to being discovered by the IRS. Although it is impossible to ensure that one won’t face an audit after making tax amendments, promptly paying your taxes before the IRS initiates an investigation can strongly indicate that there are no further reporting errors to be discovered through further scrutiny.
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