In the ever-growing demand for cryptocurrency, authorities all over the world are starting to implement rules and regulations on cryptocurrency. The very first guideline was released in 2018 in the UK, by Cryptoassets Taskforce which was a collaborated program initiated by the HMRC, Financial Conduct Authority (FCA) and the Bank of England.
The HMRC also sent requests to some of the major cryptocurrency exchanges for information regarding their UK based investors. The HMRC also stated that they view cryptocurrency as an asset and not as currency.
Similarly, in the U.S, the Internal Revenue Service (IRS) has stated that cryptocurrencies should be viewed as assets and not as currencies, this means that the taxes which are applicable to properties and assets, they are also applicable on crypto transactions. This is also called crypto tax.
The IRS also sent more than 10,000 letters to taxpayers whom they suspect to owe them taxes, on cryptocurrencies. In the notice 2014-21, the IRS states that they view virtual currency as assets and not as currency. This means that whatever you purchase using cryptocurrency is liable to be taxed as short term gains or long term gains, depending on the duration that the asset was held from the date of purchase.
Taxable and Non-Taxable Events
According to crypto tax laws, though every transaction should be reported, not every transaction is a taxable event. Following are the kind of transactions that are considered as taxable events:
- Selling of cryptocurrency for fiat currency
- Using cryptocurrency to purchase goods and services
- Exchanging cryptocurrencies for other forms of cryptocurrencies
- Earning of cryptocurrency as an income, through mining or other forms of earned cryptocurrency
The following events are transactions that are considered as non-taxable events
- Donation of cryptocurrency to non-profit organizations
- Transferring cryptocurrencies between the wallets you own
- Buying cryptocurrency with fiat money
- Gifting small amounts of crypto (below $15k)
How Much do You Have to Pay
The amount of tax you are liable to pay is determined by the duration of time you’ve held the bitcoin/cryptocurrency
Short Term Capital Gains
If you happen to sell the cryptocurrency you posses, within one year of purchase then you are subjected short term capital gains. They are added to your income for tax purposes, also they are subjected to the normal income tax rates.
Long Term Capital Gains
selling your cryptocurrency after a year, from the date of purchase, then you are subjected to long term capital gains which starts can either be 0%, 15% or 20% depending on your taxable income. Long term gains taxes usually are shorter compared to short term capital gains taxes which means it is better to sell after a year, from the date of purchase.
Calculating Your Crypto Taxes
Collect Relevant Data
Before calculating and filing your taxes, you need to collect all the relevant data beforehand, this makes the calculating and filing process much more efficient.
Depending on when you got into crypto, how much you’ve transacted and for what purposes. Choosing the right calculation method is important as it gives you more accurate results. IRS guidelines provide instruction on how to perform specific identification. To calculate using a specific identification method, you are supposed to identify all the bitcoin transaction dates of the year by using the evidence from the blockchain.
Using the Right Crypto Tax Calculator
Choosing the right platform matters a lot as it will make sure you have full reports and will also be alerted of missing information. Choosing the right crypto tax calculator will help you meet all the requirements of the IRS.
Which Tax Form Applies To You?
It is vital to understand which tax forms are applicable to you. For capital gains, people use Form 8949 and for reporting any ordinary income, use Form 1040.
Here are a few additional tips that one may overlook:
- Sometimes it can be hard calculating taxes on transactions which took place throughout the year and if you’re doubtful of the result you’ve arrived at, it is wise to consult a tax professional
- A very common mistake among people is that they forget the deadline they’re supposed to file the tax before the deadline and people who fail to do so end up paying penalties.
Crypto Tax Calculators
To make the task of calculating your taxes easier, there is something known as, crypto tax software, to help you get accurate results in your calculations. Crypto tax calculators are online tools that help you calculate your taxes based on the information you provide. By using these tax calculators you eliminate the room for human error and the calculations are done much more efficiently. More importantly, using crypto tax calculators ensure that are IRS compliant. There are many crypto tax softwares that one can use to calculate their taxes
It is an application that provides its users with the income report, capital gains report and more.
They are also into servicing mining companies.
A crypto tax software developed by Coin Ledger. It lets you add your crypto income, import trades, and download reports. Also, it has directory included for accountants.
It is a social trading platform and they are not into providing services for crypto traders but instead, they launched their own crypto tax calculator that anyone can use for free.