A quick rundown on taxable crypto transactions
If you’re wondering whether or not to disclose certain crypto transactions on your federal income tax return, now is the time to find out. You don’t want an “educational” letter from the Internal Revenue Service (IRS) due to wrongly reported crypto transactions, requesting back taxes or interest. With our guidance, you can confidently file and put yourself in a good position. We have listed below some key basics for your understanding:
- Many forms of cryptocurrency transactions are taxable, with their own set of laws and exceptions. You’ll need to disclose your crypto transactions to the IRS if you sold, converted, spent, earned, or staked it.
- The profit you make from cryptocurrency trading is taxed as either ordinary income or capital gains at different rates. Other factors to consider are how you obtained them and how long you held them. Cryptocurrency sales are considered equal to stock sales by the IRS, with the difference that if you store it for a year or longer before selling it, you’ll pay a lower tax rate.
- Swapping Bitcoin for Ethereum is also taxable. As you have technically sold your Bitcoins to buy Ethereum either by booking a profit or a loss. Similarly, if you have Bitcoin worth $10,000 and now the price has increased to $30,000 and you spend it on a car worth $30,000 then you fall under taxable gain.
- You won’t have to declare cryptocurrency purchases made with cash because they aren’t taxed. You won’t have to disclose sending coins between your wallets or gifting up to $15,000 in cryptocurrency to a friend or family member in 2021. According to the recent IRS guidance, you may be allowed to claim a deduction if you donate crypto directly to a 501(c)(3) charity organization.
Not only is it critical to report and pay taxes on your crypto activity, but it is also required by law. Ignoring these taxes might result in severe penalties, so make sure that all of your crypto transactions are taken into account.