Read about the four tax tips to avoid the common mistakes that taxpayers make when it comes to crypto taxes.
Filing and reporting taxes is a cumbersome process. Crypto taxes being a relatively new topic for most buyers and investors, and the Internal Revenue Service (IRS) bringing in new tax rules and regulations, understanding tax on cryptocurrency has become all the more important.
Here are a few tax tips for cryptocurrency that will help you file and report taxes in a seamless manner.
According to the Notice 2014-21 of the Internal Revenue Service, cryptocurrency holdings and transactions are considered as property and not currency. Crypto taxes depend on how long you have been holding the crypto and your income tax bracket as well. This is where your taxes are classified as short-term capital gains taxes and long-term capital gains taxes.
Short-term capital gains taxes apply when the crypto is sold before completion of one year from buying them, whereas long-term capital gains taxes apply when the crypto is sold after a year of buying. The tax rates vary from 10% to 37% and 0% to 20% respectively.
Taxes in themselves are a complicated process, and crypto taxes being relatively new can easily baffle you.
Here are some of the tax tips to avoid the common mistakes that taxpayers make when it comes to crypto taxes:
There are a few pieces of information that you need to know when filing crypto taxes. In order to ease the process of tax filing, you must keep a record of every transaction that you make:
● Date and time of acquisition
● Basis and fair market value at the time of acquiring
● Date and time of selling
● Fair market value at the time of selling
Doing so will make your tax calculation even easier.
Well, most people are unaware of this but, you have to include the crypto transaction history of past years as well! Sounds weird right?
When submitting your crypto taxes, you must provide your full transaction history. But why must one do this? This is because of cost basis value in finance. Including your full crypto transaction history has a good side to it as well. If your records reveal that you incurred losses in prior years, reviewing them might help you save a lot of money on your taxes.
While cryptocurrency earnings are subject to taxation, cryptocurrency losses can be utilized to lower your tax burden- and most taxpayers are unaware of this fact.
As mentioned above, crypto is treated as property. Due to this, even if you incur losses in a particular year, you can use them to offset your capital gains and this can reduce the overall tax that you pay.
You can offset up to $3000 every year in your regular income. Another great thing about crypto is that wash sale rules do not apply to it.
Two of the most followed calculation methods are first-in-first-out (FIFO) and last-in-first-out (LIFO). The FIFO method means that coins that are bought first are sold first. Conversely, the LIFO method implies that the coins bought last are sold first.
Needless to say, both processes bring out different outcomes in your capital gains. Thus it is advisable to be consistent about your cost-based method. Also, the IRS does not allow you to switch methods very easily. So if you want to shift to a different method, you must physically make a request for permission to change the cost-basis method.
Crypto taxes in itself can be a complicated process, and with the IRS bringing in new regulations every now and then, the already complex process can make anyone make small mistakes that can often cost taxpayers an arm and a leg.
With these four tax tips for cryptocurrency, you can ensure that your tax reporting will be smooth and hassle-free.
The tax rates on short-term capital gains and long-term capital gains range from 10% to 37% and 0% to 20% respectively.
Including your full crypto transaction history can reveal if you incurred losses in prior years. Reviewing your previous losses might help you save a lot of money on your taxes.
You can use crypto losses to offset your capital gains and this can reduce the overall tax that you pay, even if you incur losses in a particular year. You can offset up to $3000 every year in your regular income.
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