If you have cryptocurrency, you have an asset that could draw the attention of the IRS. Cryptocurrency tax can be complicated, which is why you should work with tax attorneys driven to get the best results for their clients.
Cryptocurrency has become a mainstream way to make money. At first many thought it was a way to move money without having to inform the IRS, but this is no longer the case. It is important to properly file and pay your cryptocurrency taxes. It doesn’t matter if you have gains or losses, both need to be reported as the IRS expects you to file all individual trades.
If you do not file and pay taxes on cryptocurrency trades, you could be severely punished. You could be fined up to $250,000 or you could be put in prison for up to five years. To avoid problems with the IRS, there are a few tax-related items you should know.
- There are two types of cryptocurrency taxes
Cryptocurrency is considered property, so it requires taxpayers to claim it as a capital gain. But, there are long-term and short-term capital gains taxes. If you have owned cryptocurrency for over one year, then you have a long-term capital gain. If you’ve only had them for less than a year, then you have a short-term capital gain. Long-term capital gains taxes are often lower than the short-term taxes. In many cases, the tax rate depends on your state of residence and your tax bracket.
Along with capital gains, cryptocurrency can also trigger the need to pay income tax. One situation that would require income tax payments is if your employer pays you cryptocurrency. The amount would be taxed the same as US dollars, and the amount would be based on what tax bracket the amount falls into. Almost all of the states require income tax to be paid on cryptocurrency used as payments.
- There are two tax forms required for cryptocurrency taxes
If you have to pay tax on cryptocurrency, you will need to use one or both tax forms. If you are using cryptocurrency as an investment, you will most likely need Form 8949 to report your digital transactions. You should keep accurate records of your transactions because you will need to put them on the form. Your gains and losses will need to be recorded on Form 1040 Schedule D.
- Cryptocurrency taxes are in flux
As the world of cryptocurrency continues to evolve, so will the way that the IRS taxes them. No matter how they are taxed, investors should keep records of all transactions so they can work with their tax professionals and with the IRS if need be. As the IRS continually changes tax codes for all types of investments, staying ahead of the changes is the job of tax professionals. If you trade something as complicated as cryptocurrency, now is the time to find a tax professional to help you properly prepare your taxes.