The ins and outs of taxes are relatively straightforward, but what about tax implications regarding cryptocurrencies? The rise of cryptocurrencies such as Bitcoin and Ethereum have resulted in questions surrounding tax implications. The Internal Revenue Service (IRS) continues to put more energy, time, and resources into enforcing laws surrounding cryptocurrency taxes.
If you’ve been wondering how cryptocurrency affects your taxes, then you are in the right place. Here is additional information that our cryptocurrency experts want you to know.
Are Cryptocurrencies Taxable?
Yes, depending on the transaction type, cryptocurrencies are indeed taxable. Taxpayers who use a regulated centralized exchange, such as Coinbase, are under watch by the IRS to ensure that the taxpayer is complying with all tax rules.
It’s important to note that the tax implications surrounding cryptocurrency are dependent on how the cryptocurrency was acquired. An example of a non-taxable acquisition, is in the form of a credit credit reward. For example, if you receive credit rewards in the form of cryptocurrency, this reward is not considered taxable income but rather a rebate. An example of a taxable acquisition, is in the form of loan interest. For example, if you loan out some of your cryptocurrency and receive interest on the loan, that interest in the form of cryptocurrencies is a taxable acquisition.
For tax purposes, the IRS deems cryptocurrency as property. Because of this, certain cryptocurrency transactions are considered to be a taxable disposal of the asset which triggers either a short or long term capital gain or loss.
Tax Differences Between Cryptocurrencies and Traditional Securities
Another factor to consider is how cryptocurrency taxes are calculated as there are differences compared with traditional investments that you might have in your portfolio. While stocks and bonds are subject to wash sale rules, this is not the case for cryptocurrency. This is due to its classification as property by the IRS.
Tax-loss harvesting is another consideration. In order to qualify, you’ll need a taxable investment account. This means if you currently have crypto in a self-directed IRA, you won’t be able to take advantage of tax harvesting. A realized loss is also necessary to qualify for tax harvesting. If you earned a significant amount from one cryptocurrency, you can offset your gains with losses incurred from another cryptocurrency.
What Happens If You Don’t Report Cryptocurrency on Your Taxes?
In the case that you don’t accurately report cryptocurrency on your taxes or if you fail to do so altogether, you will face IRS penalties and interests that can add up to be quite significant.
Thankfully, there are other strategies to reduce your tax liability legally and cut down on the amount that you owe for taxes. Some tactics include taking profits in a low-income year, buy and sell via your IRA or 401-K, give a cryptocurrency donation, or out a cryptocurrency loan.
Hopefully this information was helpful in regard to your cryptocurrency taxes issues. For additional information on this topic or to learn more about how our cryptocurrency tax experts can help, get in touch with our team at Founders CPA today!