US tax laws treat cryptocurrency as property, like any other asset. General tax principles therefore apply to any crypto transactions, but let’s look at what that really means. This article gives crypto tax accounting tips that will help you get your taxes done correct and lower you stress at tax time.
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How Will I Be Taxed For Selling A Cryptocurrency?
In crypto accounting each time you sell your digital assets, it will be recognized as either a capital gain or loss. Gains will be taxed depending on whether you’ve held them long or short term. If you hold digital assets for less than one year it will be classed as a short-term capital gain that for US citizens is taxable at the same rate of ordinary income, from 10% to 37%. Furthermore, if you wait for more than one year before selling it will be classed as a long-term capital gain and taxed between 0 and 20% depending on your income level. For a deeper dive see Publication 544, Sales and Other Dispositions of Assets.
You must know, in crypto tax accounting, the gain or loss is calculated by the difference between your adjusted basis and the amount you sold for cash or fiat. Simply put, the cost basis is the amount you spent to buy your crypto and includes fees, commissions, and any other costs. For more information, see Publication 551, Basis of Assets.
How Is Cryptocurrency Income Taxed?
According to tax law, getting paid in property including crypto for performing a service as an employee or not counts as ordinary income as stated in the Publication 525, Taxable and Nontaxable Income.
If self-employed the digital assets will for crypto accounting purposes be measured in FIAT at the date of receipt. This is counted as self-employment income and is taxed accordingly.
Similarly, for employees, the cryptocurrency paid for wages is measured in FIAT at the time of receipt and is subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage, and Tax Statement.
For more information visit Publication 15 (Circular E), Employer’s Tax Guide PDF at the Internal Revenue Service (IRS) website.
How Are Crypto Transactions Taxed?
Accounting for cryptocurrency transactions is quite counterintuitive. Paying for a service using cryptocurrency is counted as exchanging a capital asset and will have a gain or loss at the time of the transaction. Making purchases with your cryptocurrencies that are trading in profit will incur a short or long-term capital gain tax. The gain or loss is calculated as the difference between the cost of the service and the cost adjusted basis of the crypto at the time of transaction.
How Can I Report Cryptocurrency Transactions?
According to IRS rules you must report sales, transactions, and capital gains or losses on Form 8949, Sales and Other Dispositions of Capital Assets, and summarize capital gains and include deductible capital losses on Form 1040, Schedule D, Capital Gains, and Losses.
Additionally, to comply with IRS and crypto tax accounting rules you’ll have to maintain a record of our transactions by storing receipts, sales, exchanges, and time stamps of transactions on the blockchain to prove the fair market value.
Where Can I Find More Information?
More information can be found at IRS.gov/virtualcurrency, Notice 2014-21 PDF, and Rev. Rul. 2019-24.
The Easiest Way, Crypto Accounting Software
Accounting for every crypto transaction manually on your own is extremely time-consuming. Not to mention that even a small mistake may result in a hefty fine on part of the IRS. If you are a person very active with crypto, it’s almost impossible you’ll be able to do it error-free. It’s extremely difficult to do yourself.
However, crypto tax accounting software can automate much of the process. Users can connect the software to their wallets, and all transactions that are made will automatically be accounted for, saving a lot of time and energy. Some of the best options out there you should try out are TaxBit, CoinLedger, and Token Tax.
Still if you have a lot of transactions from multiple exchanges, wallets, various cryptocurrencies, margin fees, DeFi or mining activity, you really should you the services of a qualified crypto accountant or crypto CPA.
Why? Because there are severe IRS penalties and fines for sending in inaccurate tax return due to errors in crypt tax accounting software. You won’t be able to blame the software if you get into trouble with the IRS and/or your state tax department. Often the tax savings, peace of mind and avoiding IRS problems, fines and penalties is worth the modest service fee of working with a cryptocurrency tax accountant. A crypto CPA can assure all your transaction accounting is done correctly and accurately and help you rest well at night.
Results Tax Accountants provides a professional crypto tax accounting service to crypto investors, individuals, traders, DeFi participants and miners.
Author Bio:
Mark Robert is a Crypto tax accountant and founder of Results Tax Accountants at www.ResultsTaxAccountants.com, a firm specializing in small business, individual, cryptocurrency tax and accounting. He’s on a mission to help individuals and businesses eliminate tax and accounting headaches, stress and reduce their total tax burden.