It may seem as though tax season just ended, but in reality, cryptocurrency taxes are an ongoing topic that requires your attention throughout the year. Despite the popularity of cryptocurrency, many people still have questions about how to navigate taxes. To make things easier, our team has outlined some of the most frequently asked questions about crypto taxes.
Frequently Asked Questions on Crypto Taxes
Is Crypto Treated as Property or Currency?
Let’s start with the basics. According to the Internal Revenue Service (IRS), virtual currencies such as Bitcoin or Ethereum, are treated as property and not currency. This means that general tax principles that apply to property transactions also apply to your cryptocurrency transactions. In other words, any time you sell or exchange crypto, it’s considered to be a taxable event, and you’ll be subject to a long-term or short-term capital gains tax depending on the specifics of each transaction.
Do I Need to Report Each Crypto Sale or Exchange Transaction?
Any time you dispose of your crypto, whether you trade, exchange, or spend it, make sure to report these transactions. You can use Form 1040, Schedule D to do so. On the other hand, if you buy any sort of crypto, you won’t need to report until you sell.
What Do I Need to Know About Crypto Tax Audits?
In recent years, the IRS has cracked down on cryptocurrency taxes, so you might have received a letter. Before you panic, know that the severity depends on the version of the letter that you received. There’s an initial nudge letter, a second letter that threatens potential enforcement action, and a letter sent to those who the IRS believes to be under-reporting or avoiding crypto taxes. When preparing for an audit, you’ll need to have your crypto tax records available. This can be done either manually or through a crypto tax app.
How Do I Avoid a Crypto Tax Audit?
Although there’s no way to ensure that you won’t get audited, there are plenty of steps you can take to reduce your chances. First, be sure you’re accurate when reporting your crypto gains, losses, and income. If you have noteworthy rises or falls in income, you’ll likely want to include paperwork that explains this in your tax return. The more information that you can provide to the IRS, the better. Finally, be sure to be as accurate as possible when you’re filing. In many scenarios, this means working with a professional to help you file your cryptocurrency taxes.
Are Crypto Tax Extensions Available?
Yes, it’s possible to get a tax extension that gives you six additional months for you to file your crypto tax return. You’ll need to fill out form 4868 which is due the same day as the tax filing deadline.
Seeking Guidance From Founder’s CPA
With so many opportunities for error, why not partner with a professional to help ensure your taxes are filed accurately and properly the first time around? At Founder’s CPA, our team has extensive experience in crypto accounting and we can ensure you stay compliant. Contact us to schedule a free initial phone call!
