The Internal Revenue Service (IRS) recently said it is in the process of mailing 10,000 educational letters to taxpayers it suspects owe the government taxes on virtual currency transactions. It is entirely possible that the federal agency has based its list of recipients on customer data it acquired from cryptocurrency exchange Coinbase. Those who do not report income correctly can face penalties, interest or even criminal prosecution, warned the IRS. TokenTax is one of the easiest ways to report your cryptocurrency capital gains and income taxes.
How is crypto tax calculated?
To find your total profits, multiply the sale price of your crypto by how much of the coin you sold. If you have 2 bitcoin and the selling price is $10,000, then the total sale amount is $10,000 x 2 = $20,000. Next, subtract how much you paid for the crypto plus any fees you paid to sell it.
It’s wise to come clean now if you know you have errors in reporting crypto transactions. Historically, taxpayers have performed better in seeking abatement of penalties if they come forward to the IRS before getting busted first. The IRS might know there is unreported income based on tax information obtained through enforcement actions, which include the summons against U.S. You received the letter because you didn’t file a tax return, which should have included virtual currency transactions. Alternatively, you filed a return but did not report virtual currency transactions.
Over the past year, the IRS has sent out thousands of warning letters to investors and updated their tax guidance on virtual currencies. This guide breaks down the fundamentals of Bitcoin taxes and walks through the reporting process in the United States. Taxpayers should consider using a trade accounting solution or software program to download virtual currency transactions from all coin exchanges and private wallets. Many crypto owners have accounts around the world, and accounting issues are more challenging when trading on margin.
Some crypto users might try to claim ignorance or argue they received terrible tax advice. Others might assert that the crypto tax rules were too vague and uncertain at the time of filing. After receiving these education letters, which are warning shots, there are no grounds for continued non-compliance. The IRS has various types of tax information for virtual currency account owners, and it selected the letter that best matched their knowledge base. The IRS is also using third-party services to obtain more tax information.
How much tax do you have to pay on Cryptocurrency?
Cashing Out of Crypto If the same trade took place over a two-year timeline, long-term capital gains taxes correspondneymar to one’s tax bracket are applied. This is 0% for those in the 10-15% income bracket, 15% for those in the 25-35% income bracket, and 20% for those in higher brackets.
This means that crypto must be treated like owning other forms of property such as stocks, gold, or real-estate. Just like you would with trading stocks then, you are required to report your capital gains and losses from your cryptocurrency trades on your taxes. According to official IRS guidance, Bitcoin should be treated as property for tax purposes — not as currency. This is true for all cryptocurrencies such as Ethereum, Litecoin, XRP, etc.
Ultimately, you need to file your crypto taxes, whether you’ve used Coinbase or not. You need to report income as well as capital gains and losses for crypto. Thus, individuals pay taxes at a rate lower than the ordinary income tax rate if they have held the bitcoins for more than a year. However, this also limits the tax deductions on long-term capital losses one can claim.
We will tell you all you need to know about properly reporting your cryptocurrency capital gains, capital losses, and income. And if you’re trading bitcoin or cryptocurrency so frequently that you’re effectively running it as a business, you may need to pay income tax instead of capital gains tax. If you’re trading bitcoin or cryptocurrency so frequently that you’re effectively running it as a business, you may need to pay income tax instead of capital gains tax. All of their options include cost basis reports (FIFO, LIFO, HIFO, ACB, Share pool), auto-sync with exchanges and wallets, capital gains reports, and exportables like IRS Form 8949, TurboTax and TaxAct.
- The Internal Revenue Service (IRS) recently said it is in the process of mailing 10,000 educational letters to taxpayers it suspects owe the government taxes on virtual currency transactions.
1 Do I have to pay crypto taxes?
For tax purposes, Bitcoin must be treated like owning any other other form of property (stocks, bonds, real-estate). This means that you are required to report your capital gains and losses realized when trading Bitcoin and other crypto’s. Reporting your trading gains and losses and properly completing your Bitcoin taxes is becoming increasingly important. Governments around the world are paying much closer attention to Bitcoin and other cryptocurrencies after seeing the market value skyrocket over the past years and into 2020.
Each year, US taxpayers with taxable crypto events are required to report their gains or losses to the IRS. If you’re a US taxpayer who sold, used, or converted crypto in 2019, you may owe taxes on those transactions. We’ve outlined what to expect from Coinbase and the resources available to you. Our goal is to help all crypto traders better understand crypto taxes by providing tax resources for Coinbase customers as well as the broader crypto community.
Rated by Forbes asthe best platform for filing cryptocurrency taxes, TokenTax is the only crypto tax platform that supports every major exchange. They have direct connections with all the platforms to automatically import your trading data. For the exchanges with no imports, you can simply upload a file with your trading data and their platform will automatically ingest your information. The solution to the crypto exchange tax reporting problem is to aggregate all of your transactions across all of your exchanges, wallets, and cryptocurrency platforms into one unit of record. Once all of your buys, sells, trades, and transactions are in one place, you can then do the necessary capital gains and capital losses tax calculations needed for tax reporting.
If you are a tax professional, CPA, or accountant firm, you can use BitcoinTaxes to import and calculate your client capital gains as well as income from mining or crypto-currency payment processors. This IRS letter campaign is just the beginning of virtual currency enforcement activities to come. You should take this opportunity to get fully educated, review your reporting, and be sure you are tax compliant. Pay tax liabilities and interest expenses, and then seek abatement of penalties when assessed.
The million-dollar crypto question
If you want to learn more about how crypto taxation works in general i.e. the laws and regulations, you may want to check out this crypto tax guide. Again, US citizens pay US tax on their capital gains and cryptocurrency gains no matter where they live. If you move to Panama, but keep your US passport, you still pay US tax on your trading profits. The only way to get rid of the IRS forever is to turn in your blue passport.
Arguably, the easiest method of avoiding taxes on your cryptocurrency gains is to put them into a 401k, IRA, or any other qualifying retirement plan. We already mentioned that the Internal Revenue Service views all cryptocurrencies as capital assets. Based on the law, retirement accounts can hold, buy, or sell cryptocurrencies. Cryptocurrency taxes (known formally as capital gains taxes) have to be paid on the profit/loss that you make from crypto trading.
For example, during 2019, if you just held bitcoin and did not sell, you would not have any taxable amount to report. In these cases, the IRS will use the cryptocurrency question as a way to gather data about US crypto holders and keep an eye on future years for taxable events.
Receiving crypto rewards
Capital losses are limited to total capital gains made in the year plus up to $3000 of ordinary income. You incur a capital loss when you dispose of a capital asset (in this case crypto) for less money than you acquired it for. These losses actually reduce your taxable income on your tax return and therefore can be used to save you money. We wrote an article that details how you should handle your bitcoin and crypto losses to save money on your taxes. Both capital gains and capital losses from your crypto investing activity need to be reported on your taxes.
The brokers and exchanges providing cryptocurrency transaction services are currently not mandated to specifically provide tax reports to individuals for their trading activities. However, exchange like Coinbase do provide a “cost basis for taxes” report, which can be used to compute the net profit/loss. This is an extremely broad question and will require you to check “yes” even if you are just holding crypto in an exchange or wallet. If you mark “yes”, first & foremost, it would signal the IRS to check various forms & schedules of the return for cryptocurrency gains & losses. However, everyone who marks “yes” may not have a reportable taxable event.