When the tax season arrives and you have been dealing with cryptocurrencies in the previous tax period, then you need to know that cryptocurrency is categorized as any other asset class. However, to most investors, the cryptocurrency tax system appears so complicated that only a few people understand what needs to be done and file them. While some see cryptocurrency as a mean to move money illegally, others try to fulfill their duties as a responsible citizen by paying their taxes on holding them.
Whether you are an entrepreneur relying on cryptocurrencies to operate your business or an investor looking to gain profits, it is the moral duty of every person to file taxes on the money earned through these means. So, while you worry about finding the best place to build a business website, you should also look for someone to help you with filing your taxes, at the same time! As the crypto world is coming to the mainstream, the Internal Revenue Service (IRS), has shifted its focus towards digital assets. Here are the basics you need to know about cryptocurrency taxes.
All Cryptocurrency Sales and Trades are Taxable
Stating it loud and clear, you must report to the IRS any gains or losses on all individual trades. This also includes exchanging cryptocurrencies, converting them to USD or spending them as all of these are taxable events.
The Increasing Focus on Crypto Taxes
If you don’t end up paying cryptocurrency taxes, you could be directly violating the rules stated by the government. Not filing cryptocurrency taxes can get you a maximum sentence of five years in prison or a fine of $250,000. During the initial days of the crypto boom between 2013 to 2015, the crypto tax filers were around 900. Because of the ever-increasing focus of the IRS and some recent court cases, nowadays there is an increasing number of traders who file their crypto taxes.
The Types of Cryptocurrency Taxes
The IRS classifies cryptocurrencies as property, not currency. This means that you have to pay capital gains tax. The two different types of taxes are:
1. Long-term Tax
This tax is applicable if you have held onto a currency for more than a year before liquidating it. Each state has its own rules when it comes to the percentage of this tax.
2. Short-term Tax
If you keep a currency for a short period before trading it, the short-term tax will be implemented. Usually, the long-term taxes on capital gains tend to be lower than the short ones. Similarly, the cryptocurrencies are also subjected to income tax if your employer is paying you in crypto. The tax amount shall be based on the cryptocurrencies value equivalent to USD – income taxes implemented by the IRS range from 10 to 37%.
Miners Also Have to Pay Taxes
Cryptocurrency miners are also included in the tax net, and they are supposed to pay taxes on their earnings. Since mining is classified as self-employment, this tax comes out to be around 15.3%. Miners can avail deductions by showing their expenses, such as employees or electricity bills.
Cryptocurrency Tokens Are Tax-exempt
The IRS updated its stance in 2014 and implemented taxes. It is being speculated in the market that tokens are represented as services, not currency – therefore, they are not subjected to federal tax laws. According to IRS, taxable crypto is “virtual currency that has an equivalent value in real currency”. And tokens happen to fall outside of this definition.