Cryptocurrency has become a massive market with unlimited earning potentials. That said, this big platform is not exempted from taxes. The Internal Revenue Services has issued letters to various crypto holders on developing a system to track down taxes. It means taxpayers should follow the IRS rules, and those who have neglected might be in trouble. So, do you know how to pay taxes on crypto trading?
This became a concern with many bitcoin investors since not all are up-to-date in terms of tracking taxes. Currently, there are over 35 million customer accounts utilizing cryptocurrency. But the current number of taxpayers reporting crypto trades only reaches a few hundred. If you think you can plead ignorance of tax laws, then you’re in for a surprise. The IRS came up with an updated Form 1040 that forces taxpayers to declare any digital asset. If you want to avoid state tax penalties, we will guide you on the steps on how to pay taxes on crypto trading.
What Is Cryptocurrency?
Before we go on the various ways on how to pay taxes on crypto trading, let’s first learn the basics of cryptocurrency. It is a digital currency in the form of coins. According to the IRS, cryptocurrency is the “digital representation of value.” Although cryptocurrencies do not use physical money, you can still use them for various online transactions. Since banks do not control crypto exchanges, you might be wondering, “How do you pay taxes on crypto trading?”
Coins do have their unique blockchains that act as an online ledger. So all exchanges and trades are all encrypted in the blockchain. You can store your coins in your online wallet and use it to pay for goods and services, invest, or exchange with other investors. However, you still cannot use this digital money for most vendors. Although some companies already have developed a system to utilize it.
Cryptocurrency as Property
The IRS has considered cryptocurrencies as property. Thus, all taxpayers are required to declare all transactions involving this trade. To do so, you have to determine your cryptocurrencies’ current market value by converting them into US dollars, taking into account the current exchange rates. That said, if you’re planning to take part in this digital trade, you have to prepare extensive bookkeeping to track down your taxes. You can find various online applications, such as QuickBooks, to help you record all your crypto transactions.
Cryptocurrency and Capital Assets
Your home and stocks are a part of your capital assets. The same is true with your cryptocurrencies. So you need to pay either short term or long term capital gains. You can calculate your gains and losses by taking your cost basis and calculating the total increase or decrease since the day you acquired the asset. However, virtual currency assets are still considered as ordinary income and not a capital gain. Thus, standard taxes apply.
Figuring out how to pay taxes on crypto trading is made easy by various online accounting websites such as TurboTax. It provides an easy way for you to track your cryptocurrency trades, gains, and losses. It also provides you with guidance, so you know and understand all the processes along the way. However, you need to purchase its premium edition for this feature.
Once you open the website, you can go to the Investment Income tab to track your cryptocurrency. Here are the four situations required for this section:
- Selling of cryptocurrency.
- Conversion of cryptocurrency to fiat currency such as USD or EUR.
- Exchange or trade for another cryptocurrency type.
- Purchase of products and services using cryptocurrency.
Transactions involving cryptocurrencies are sometimes reflected on Form 1099-B, Form 1099-K, or a tax statement issued after an exchange. Since these forms are not required when exchanges are made, you have to be 100% responsible for tracking down all your transactions. To do so, download a copy of your trading history from your digital platform. Then, you need to input all data manually.
With TurboTax, you can conveniently download CSV files from various cryptocurrency platforms such as Bitcoin.Tax, Coinbase, CryptoTrader.Tax, BitTaxer, CoinTrackerRobinhood, TokenTax, and ZenLedger. Add your file or browse through the system to find your trading data.
If you opt to enter all your data manually, here is the information you need to provide:
- Service name
- Asset name (Bitcoin or Ethereum)
- Purchase date
- Cost basis
- Sale date
- Sale proceeds
In case your CSV files do not match those in TurboTax, you’ll need to contact your exchange to complete all the fields. After completing all data required, you’ll then be prompted to summarize all transactions that took place in terms of your cryptocurrencies. You can either add more or complete the ledger. Once finished, the final summary will reflect whether the transactions are short-term or long-term, verifying what needs to be reported on your tax return form. Get more trade secrets in cryptocurrency here!
Learning how to pay taxes on crypto trading can be a lot of work. But, many websites like TurboTax now offers an easier way to track down all your crypto movements. This way, you can diligently report and taxes to avoid breaking the law. On the other hand, not doing so can lead to possible legal violations. If you are unsure of how to go about the accounting aspect of cryptocurrency, you can also tap professional help to guide you. Ask an accountant or tax attorney on how to declare your crypto assets and file your taxes properly.
Once you are already confident in your understanding regarding the tax process, you can then utilize online websites for convenient tracking. Although it might take a while for you to get the hang of your digital coins’ accounting and tax aspect, once you get the pattern, the process will then be more manageable.