Top five things related to taxation you should know as a crypto investor

Cryptocurrencies were a non-taxable asset for a very long period of time.

However, after the 2017 Bitcoin bull run and subsequent price successes, central institutions became aware of tax advantages available to crypto traders and investors. Hence, central institutions that accepted crypto trading started to tax the users. 

Unfortunately, cryptocurrency taxation is not as simple as you might think. It is far more complex than a regular taxation process.

The reason is its decentralised nature. Due to this, many people have been using Bitcoin and cryptocurrency to move money away from the central financial network illegally to avoid paying taxes.

Now, when cryptocurrencies are more close to becoming mainstream currencies, the Internal Revenue Service (IRS) is more focused on digital assets. Today, it is important to pay crypto taxes.

All cryptocurrency trades and investments are taxable

When you are in the crypto trade market, you are liable to pay taxes on your crypto profits.

All your trade is recorded, and all your investments are reviewed to ensure that you are paying the right tax for the profits you have in the crypto trade market. Even if you exchange crypto assets with the other, it is also considered taxable.

This taxation happens at the end of every financial year. The price evaluation of the cryptocurrencies is done based on the cryptocurrency market price at the time of the trade.

The IRS has increased its focus on crypto taxes

The IRS has become serious about crypto trade taxation. It is now very important that you pay tax on the crypto trade you have made over the last years. If you fail to do so, you will be charged for illegal activity.

What will happen if you do not pay crypto tax? As mentioned above, it is now considered one of the regular incomes and is charged accordingly.

Hence, not paying crypto tax will be considered tax fraud. It can result in a prison sentence of five years and can accrue a fine of $250,000.

Types of cryptocurrencies taxes

According to the IRS guidelines, cryptocurrencies are considered property and not currency. That means you have to pay capital gain tax.

When we talk about capital gain tax, there are two types of capital gain: Long-term and short-term. Here long-term means that you have held the cryptocurrencies for more than a year before trading, and in the case of short-term, you have traded the cryptocurrencies within the year.

Crypto trade can also be subjected to income tax. This happens when you are paid in cryptocurrencies. Here people are paid the equivalent amount of dollars in cryptocurrencies.

This makes the cryptocurrency income tax divide into seven brackets and is changed from somewhere between 10%-37%.

Crypto taxes require two tax forms

Most of the cryptocurrency taxes come from traders and investors. For them, they need Form 8949 to file taxation. This is where investors and traders describe their assets in a detailed format. They are asked to give every possible detail of their trade to complete the whole process. 

The second form, Form 1020 Schedule D, segregates the long-term gains and short-term gains. This form holds detailed information and helps you with the efficient taxation process.

Even crypto miners have to pay tax

Crypto miners are also covered in the crypto trade taxation. They are subject to income tax. Crypto mining is the process where the miner evaluates the information and transaction transfers one block of information in the process.

For the transacting one block of information, miners are rewarded with cryptocurrencies. That means they are getting paid for the work they have done. Hence, taxation falls under income tax.

If we are precise with tax, it will be more on self-employment tax, currently around 15.3%. Fortunately, miners can take advantage of self-employment and reduce taxation by showing the overhead cost of electricity.

The bottom line

Cryptocurrency and blockchain are in the early stage of evaluation. And we have a lot more to come from them.

As we can see how the central institution is taxing on crypto income, there is a glimmer of hope for cryptocurrencies competing on an international platform as alternatives to fiat currencies.

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