Knowledge keeps you free of tax issues and any adverse consequences when you're dealing with cryptocurrency taxes. It was once said the only things certain in life are death and taxes. In cryptocurrency, being knowledgeable about crypto tax laws and how to file cryptocurrency taxes accurately is vital information to have.
The IRS feels so strongly about cryptocurrency taxes that, in their 2019 tax form, they asked every taxpayer if they had sold, sent, exchanged, or acquired any financial interest from a virtual currency during the year. According to the IRS, it doesn't matter if you mined for cryptocurrency or had a business that used it; there are still taxes that need addressing.
Keep reading if you want to learn how to file your cryptocurrency taxes correctly and get the maximum tax breaks when you do!
Even with the 2019 tax forms new cryptocurrency questions and changes, it’s not uncommon for regulations to change month to month. That makes understanding the dynamics and new rules a bit complicated. Tax law for cryptocurrencies is still considered a work in progress.
The IRS made sure to report that starting in 2019; there will be increased tax enforcement moving forward. Every tax type from personal, corporations to LLC's are taxed differently. If you add to the cryptocurrency equation, there may be even more regulations you need to be aware of before filing your personal or business taxes; the result could be widespread confusion and anxiety.
Some cryptocurrency tax services offer historical tax forms for users. These services also have a team of tax experts and software developers waiting for you, so your cryptocurrency tax process is as simple and easy as it can be. This can be significantly cheaper than working with an individual tax attorney, and many don’t have the expertise required for cryptocurrency.
it's essential to know that the federal government looks at cryptocurrency as property and not currency. Since the IRS looks at cryptocurrency as property for purposes of your taxes, it means they consider your property a capital asset. If your property is a capital asset, you will have capital gains and losses when you sell, and that means you have to pay or file taxes on it.
Cryptocurrency and 2019 IRS Tax Forms
Every time you have cryptocurrency gains or losses for purposes of your 2019 taxes, you need to address on your tax form as a gain or loss. It is on the IRS form 8949, your taxed cryptocurrency asset needs to be recorded. The hard part is knowing you need to do this every time your cryptocurrency gains or loses.
You must determine the length of time your position was held and what type of transaction you participated in when you recorded your cryptocurrency gain or loss. If cryptocurrency is viewed as a capital asset, then your profit is deemed taxable as a short-term gain if you held the cryptocurrency asset for a year or less. It would be a long-term asset if you held the cryptocurrency for a year or more.
If you held the cryptocurrency to gain profit, then a loss on it is treated as a deductible capital loss. Since there is a new IRS form that asks if you sold, sent, exchanged, or acquired any financial interest from the virtual currency, the IRS tracks this carefully. If you fail to disclose this to the IRS, they can quickly turn around and prove you intentionally disregarded the new cryptocurrency tax regulations.
When Do You Have to Pay Cryptocurrency Taxes?
It may seem like the beginning of the future is already here when you're using or investing in cryptocurrency. But when dealing with IRS and taxes most of the rules and regulations are straight from the past. While one of cryptocurrency's purposes was to loosen the stranglehold of government and banks, that's not happening at this time with IRS taxes.
The federal government looks at cryptocurrency in a watchful and alert manner. Buying cryptocurrency isn't a taxable event, nor is gifting it to someone else. As of 2019, the IRS uses two cost basis assignment methods for cryptocurrency. They are:
1. First in First Out (FIFO) — this is the preferred cost basis, which translates as the first assets you bought that will also be sold or disposed of first.
2. Specific identification — lets taxpayers select the assets being disposed of so they can optimize their taxes. This gives them a higher cost basis with a lower tax liability.
Before 2018 if you were a cryptocurrency taxpayer, you would have claimed through an itemized deduction any cryptocurrency exchange fees for any investment-related expenses. But in 2020, for the first time, taxpayers can record all their fees as investment-related expenses. They'll do this by adding them to acquisition and disposition costs in their itemized deductions.
Cryptocurrency Taxes and the Way Forward
There are many cryptocurrency tax services and software that give little to know information about the specific needs of cryptocurrency tax changes. Often cryptocurrency tax software offers limited information about how your user gains and losses are calculated. Cryptocurrency gains and losses are of prime importance to the IRS so it's not an area in which you want to be unsure.
You should never take a chance and get caught in a cryptocurrency issue you could have avoided. Cryptocurrency scrutiny is going to keep growing so when you want to stay on the good side of the IRS for yourself or your business reach out to TaxBit. Any cryptocurrency tax software service should help you stay one step ahead of new cryptocurrency legislation and tax regulations.
There's no doubt that cryptocurrency taxes being a serious business that is ever-changing. As a cryptocurrency business or investor, you know just how timely and accurate your taxes have to be so you understand in full every cryptocurrency tax and legal regulation. In the cryptocurrency arena, that is more important than ever.