How Are Crypto Currencies Taxed?
Cryptocurrencies have quickly gained in popularity, yet their complex tax rules can make them hard to understand. Now that the IRS is increasing enforcement measures against them, traders and holders of cryptocurrency must be mindful of their tax obligations.
Essentially, the IRS treats cryptocurrency like property and taxes them the same way it taxes stocks and other investments. When selling crypto for fiat money or purchasing goods and services using cryptocurrency you trigger a taxable event and your gain or loss can be calculated by subtracting its original purchase price from its fair market value at sale time – keep a log of this number for future reference!
Many individuals invest in cryptocurrency as an investment, which is considered a taxable event by the IRS. When selling or exchanging cryptocurrency for other currencies, its fair market value must be reported – as its price can fluctuate depending on market conditions. Capital losses on cryptocurrency investments may be deducted, provided they’re reported within one year and supported with proof like tax records or brokerage statements.
When receiving cryptocurrency as payment for goods or services, that constitutes a taxable event. You must report its fair market value at receipt as part of your taxes just like if you received cash or checks instead.
Report any cryptocurrency you earn through mining or other transactions. Cryptocurrency miners receive payment for validating transactions on the blockchain and adding them to public record, with this compensation considered ordinary income, unless conducted as part of a business for which expenses such as hardware and electricity may be deducted.
As anyone who trades cryptocurrency for profit should, you need to keep careful records of their purchases and sales. Many exchanges offer tools for importing trading data for keeping track of transactions; alternatively you might consider using crypto tax software programs such as TurboTax Online with extensive crypto tax import coverage for 15 major crypto exchanges like this.
Cryptocurrency tax issues can be complex, so be sure to work with an experienced professional. Failing to do so could expose you to fines and penalties should any of your cryptocurrency transactions go undeclared.
For more information about cryptocurrency and its tax treatment, visit the IRS website. There you’ll find in-depth explanations of common types of cryptocurrency transactions as well as advice on how best to handle them. You can also use their Interactive Tax Assistant tool to see if any taxes are owed; and don’t hesitate to get in touch if any questions arise concerning your specific situation!