The idea of cryptocurrency taxes might make you cringe, but it’s not as bad as you think. Unless you plan on hiding your cryptocurrency gains from the government and hoping they don’t find out, you will need to report them as additional income on your taxes.
Moreover, because many crypto transactions take place in a sort of “gray area,” reporting them correctly is essential if you want to avoid an audit and possible fines.
Deciding whether Taxes Are Due for Your Crypto Transactions
The Internal Revenue Service (IRS) sees cryptocurrency as property, not currency. This means that if you receive payment in the form of cryptocurrency, it’s taxed. However, if you pay for goods and services with cryptocurrency, there is no tax consequence.
For example, if you use bitcoin to buy stocks, the taxes are only due when you sell those stocks. It’s also important to note that the IRS has a 90-day statute of limitations. This means that taxpayers have 90 days from the date they file their taxes to amend their report if they discover they made an error.
If you realize you made a mistake, you can correct it by filing an amended return. This will extend the time frame for your tax return, but it’s better than being hit with an audit.
Determining the Cost Basis of Your Crypto
The cost basis of an investment is the price you paid for it. It includes any fees or commissions you incurred. When you sell an asset, the capital gain (or loss) is calculated by subtracting the cost basis from the net proceeds.
While many crypto exchanges do report the cost basis of assets, not all of them do. In fact, many only report the amount of proceeds earned once you sell something. If you’re keeping track of your crypto holdings yourself, you’ll need to manually add the cost basis to your investment totals.
Tax Rates for Cryptocurrency Investments
The tax rates you’ll pay on your crypto investments will vary depending on how long you hold the assets. If you purchased the cryptocurrency and sold it less than a year later, you’ll be taxed as a short-term capital gain. Short-term gains are taxed as ordinary income and are taxed at your current marginal tax rate. If you held the cryptocurrency for more than a year, you’ll be taxed as a long-term capital gain. Long-term investments are taxed at a lower rate than short-term.