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Cryptocurrency is becoming more popular and influential every day. However, even with more investors taking a chance on new cryptocurrencies such as Ethereum, Bitcoin, and Ripple, many are still confused about how they should treat their assets for federal income tax purposes. The IRS only issued guidance on this topic in 2014. What is clear is that cryptocurrencies are treated as capital assets as long as they are not converted into cash. This means that the capital gains regulations are applied to any gains or losses you make from crypto investments.
In this article we will cover some more in-depth questions that have been asked by our readers.
- How are capital gains calculated?
In taxation and accounting, both capital gains and losses are calculated from the cost basis, by examining whether the market price has fluctuated from the point of acquiring the crypto until the occurrence of a taxable event. The cost-basis is defined as the cost you pay for the assets including any exchange or trading fees.
- Do I need to pay tax on crypto-to-crypto trades?
Any gains generated from the sale or exchange of crypto will be subject to tax. So, a question that crypto traders may ask themselves is whether the sale of crypto coin for fiat is considered a taxable transaction. Well, the IRS states that the seller should report any loss or gain figure in the year the trade occurred.
Regarding exchanges of crypto coins such as Bitcoin for another type of crypto, the IRS maintains that these exchanges are also taxable. This is because crypto is viewed as property and not currency. So, any exchange within the meaning of the tax code calls for taxation unless a unique non-recognition regulation is applicable.
- How do I treat commissions and fees in crypto exchange?
After getting the basis, you will finally have the original purchase price as well as any related costs, such as commissions. In 2017, paying investment-related fees enabled many taxpayers to deduct other varying fees on their schedule A, that is, if they itemized them. In 2018, however, a new reform in tax law temporarily removed the deduction until 2025. To mitigate this, have your businesses demonstrate the investments so that you can deduct the investment-related fees in Schedule C (the entity’s tax form).
- What is a taxable event?
A taxable event involves the disposition of an asset. In the crypto world, a taxable event occurs when coins are traded for cash, other coins or when used in the purchase of goods and services.
- What is the holding period?
This is the period in which you have access to, or own, specific assets. Expert crypto-accountants specify the holding period as the timeframe spanning when a crypto owner acquires assets up to the taxable event.
- How does margin trading affect my taxes?
Numerous cryptocurrency exchanges allow traders to utilize margin to leverage standings, however, this does come with some considerable risks, such as having holdings totally wiped out through the legendary volatility of crypto. Exchanges also can’t report margin trades, thus leading to inaccurate calculations. For this reason, you should look into having a separate account for the margin trading activity.
- Do I really need to declare taxes if I have made a net loss?
If you have generated a net loss, it is still advisable to report it to the IRS. In fact, this should benefit you as you can use this net loss to offset gains from other trades or activities. For example if you made a $2000 loss on crypto trading but made a $3000 gain from renting out real estate – you will only have to pay tax on $1000! Many traders even make use of this strategy to reduce their crypto taxes. The strategy is known as tax loss harvesting.
- How are airdrops taxed?
Forks and airdrops can cause a lot of confusion – their purpose is to bring new cryptocurrencies to already existing investors or holders. An example of this is the scenario where Bitcoin holders were able to receive the same amount of the offshoot bitcoin cash. Hard forks, however, arise from a material change in the crypto chain system. You should report something on your tax return regarding these – to be on the safe side!
- Can I gift my crypto tax-free?
You can! One of the best ways to transfer crypto without triggering a tax situation is through gifts. Neither the donor nor the recipient is obliged to pay income tax in this scenario. However, don’t try to take advantage of this situation. The IRS has already heard the ‘it was a gift‘ narrative plenty of times, and they know when something is fishy.
- Where should gains or losses be reported?
When the tax period rolls around, you should strive to report gains or losses on Schedule D. You should then transfer your results onto the specific reconciliation page of the federal form 1040. About cryptocurrency taxes.
Many investors are only now realizing the need to pay taxes on their crypto gains. If you are one of them, do not panic. Get in touch with a professional crypto accountant who will help you amend your previous tax returns for the period you sold or bought crypto. The IRS offers up to three years to anyone who wishes to amend their tax returns. Better late than sorry!