If you haven’t thought about your taxes this year, this is your sign to start. While taxes on traditional assets can be confusing enough, you might have additional questions about cryptocurrency. So, how does cryptocurrency affect taxes and what do you need to know before you file this year? On a basic level, it’s essential to know that the IRS treats cryptocurrency as property; whenever you sell or exchange cryptocurrency, these are all considered to be a taxable event.
Our experts at Founder’s CPA are here to guide you through this process and briefly touch on both the positive and negative impact that crypto transactions can have on your taxes.
Before you panic, know that there are strategies that you can implement to use your crypto transactions to your benefit. One example of this is tax-loss harvesting, a strategy that you can use to lower the capital gains tax liability that you owe. To utilize this strategy, you’ll need to sell an investment at a capital loss to offset the capital gains that you’ve incurred from other assets that produced a profit. Keep in mind that tax-loss harvesting can only be used to offset $3,000 of ordinary income, or up to $1,500 if you’re married and filing separately.
Tax-loss harvesting avoids the wash sale rule, when a holder sells crypto at a loss to receive tax benefits and immediately rebuys the same or a similar cryptocurrency or security. Wash sales are allowed for cryptocurrencies unlike traditional securities such as stocks.
The IRS hasn’t issued any rules regarding crypto staking taxes, however. Mined crypto is seen as an asset that’s subject to income tax based on the fair market value of the coin when you receive it in USD.
Of course, there are downsides that you should consider regarding how cryptocurrency can negatively impact your taxes. In the case that you haven’t outlined enough transaction details, for example, if you have thousands of buys and sells within the year, it will be difficult to track the original cost basis for each transaction. Without having an accurate cost basis, you won’t be able to accurately file your crypto taxes as you won’t know the short-term capital gains versus the long-term capital gains.
In the same vein, all of your transactions must also be properly classified in order to accurately file your taxes. For example, any cryptocurrency that you’ve earned through credit card rewards will be classified differently from crypto that you earned through mining. Not closely tracking this information can make it difficult to determine how does cryptocurrency affect taxes.
It’s not too late to reach out to our team for guidance on your cryptocurrency taxes. We have seasoned CPAs who can assist you with your filings and ensure they are accurate. Contact us today to request a free consultation from our team!
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