Aside from the fundamentals of cryptocurrencies, their risks, advantages, scope, and so forth, a topic that gets discussed often is crypto tax evasion and the rules that surround it.
A sizeable number of crypto traders do not seem to have fully understood the process of filing crypto taxes. Furthermore, the rules implemented by the Internal Revenue Service (IRS) for crypto taxes do not seem to have done much to reduce the confusion.
How is crypto taxed?
You ought to know how crypto is taxed irrespective of whether you want to play by the rules or risk crypto tax evasion.
Keep in mind that cryptocurrencies are treated as assets, i.e., property. Therefore, cryptocurrencies would be taxed the same way property is taxed. Property is subject to capital gains tax, which means that cryptocurrencies are also liable to capital gains tax.
Crypto traders need to be aware of two types of taxes – long-term capital gains tax and short-term capital gains tax.
If you happen to have held your crypto for over a year, you would be liable to pay long-term capital gains tax.
However, if you sell or trade your crypto within a year from the date of purchase, you would be subject to short-term capital gains tax.
If the value of your crypto depreciates, you would have to pay capital losses. Fortunately, capital losses can be deducted from your capital gains on any asset, not just your crypto assets.
Read more here to know more about free crypto tax calculator.
When should you pay crypto taxes?
When you sell your crypto to a third party
When you sell your crypto that you have purchased from someone to a third party
When you use your crypto to buy goods or services.
When you use your crypto that you have bought from someone, to purchase goods and services
When should you not pay crypto taxes?
If you transfer your crypto as a gift to someone
If you move your crypto among your wallets
Purchasing crypto using fiat currencies like the US dollar does not make it taxable.
If you donate your crypto to an organization or charity that is exempt from tax.
What the IRS has to say about Crypto Taxes
The collaboration between the IRS and tax agencies in other countries such as the UK, Canada, Netherlands, and Australia, known as the Joint Chiefs of Global Tax Enforcement, plans to share information about crypto traders who are attempting to avoid filing crypto taxes.
The aforementioned nations have declared cryptocurrencies as assets, thereby rendering them liable to capital gain taxes.
The IRS also plans to keep a critical eye on those who are channeling their payments into cryptocurrencies to avoid filing crypto taxes.
Ryan Korner, who is a senior agent in the LA office of the Criminal Investigations office of the IRS, recently mentioned that the IRS now has the tools and the ability to track such channeling payments and crypto tax evasion attempts.
Tax Forms you should know
There are two necessary tax forms crypto traders ought to know about.
If you are planning to file your crypto taxes, make sure you list your transactions on Form 8949 instead of only totaling up them on Schedule D.
Before you fill out your forms, make a list of your gains and losses. After this, check if you have a 1099-B for each of these transactions. Classify your transactions into six separate groups.
Page One Contains:
The short-term transactions reported on a 1099-B, with the basis reported to the IRS
Short-term deals reported on a 1099-B, with the basis not reported to the IRS
Short-term trades that do not have a 1099-B
Page Two Contains:
Your long-term transactions reported on a 1099-B, with the basis reported to the IRS
Your long-term deals reported on a 1099-B, with the basis not reported to the IRS
Your long-term transactions that do not have a 1099-B
You can start to fill each form once you sort out your transactions. You need to enter the following details for each transaction.
Date Acquired: The date you purchased or were given the property.
Date Sold. The date that you sold your property.
Sales Price. This is the price at which you sold your property.
Cost or Other Basis. This refers to the amount that you paid for the property and other fees.
Your consolidated 1099 contains all your reported income and transactions for the year. Depending on your account’s activity, it may include any or all of the following forms:
This form includes sales, cover short, closing options transactions, redemptions, tender offers, and finally, mergers for cash.
This form includes ordinary dividends of $10 or more from U.S. and foreign corporations, distribution of capital gains, mutual fund dividends, federal and foreign tax withheld, as well as non-taxable distributions.
This form includes interest income of $10 or more, and federal and foreign tax withheld.
This form is for rent or royalty payments, substitute payments of $10 or more, and other incomes that amount to $600 or more.
This is the original issue discounts on corporate bonds, Certificates of Deposit (CDs), Collateralized Debt Obligations (CDOs), and U.S. government obligations of at least $10.
Payment of Miscellaneous Taxes (Like the Robin Hood tax)
This form can be used to pay a miscellaneous tax for a cause, like the Robin Hood tax. You can expect to receive two tax documents of your crypto trades on this 1099 consolidated form.
A Robin Hood Tax is a minute tax on the financial sector that can annually generate enormous amounts of money to fight poverty and climate change.
The Robin Hood Tax, also known as a Financial Transactions Tax (FTT),
is said to be able to raise up to £250 billion a year globally. Several countries, including the UK are implementing Robin Hood taxes.