Cryptocurrencies are not controlled by any centralized institutions, a cryptographic encryption system acts as the authority to control and verify all the transactions. Cryptocurrencies are mined by solving pieces of software algorithms. These crypto coins got after mining can be exchanged to fiat money like USD, or can be used to purchase products. Are there any taxes for cryptocurrencies? Have you heard about crypto taxes? This article reveals the important things you should know about crypto taxes.
Are There Any Taxes For Cryptocurrencies?
2020 is going to become a great year for cryptocurrencies, especially for Bitcoin. But the cryptocurrency tax policies are confusing people. Owning cryptocurrencies is like owning properties like gold, real estate, etc. with you. You should pay tax for the Bitcoin you hold like any other properties. Failing to pay tax is considered as tax fraud. The capital losses and gains from cryptocurrency are required to report.
How to Calculate Crypto Gain and Losses?
Below given is the detailed step by step process of calculating crypto gains and losses. If any of the following happens to you, then you should submit a report to the Internal Revenue Service (IRS).
- Changing or trading your cryptocurrency to fiat currencies like USD
- Trading cryptocurrencies to cryptocurrencies
- Purchasing products using cryptocurrencies
- Earning cryptocurrencies through mining
The below-given scenarios are not considered a taxable event.
- Gifting cryptocurrencies without profit
- Transferring crypto between exchanges or wallets
- Purchasing cryptocurrencies using your fiat currencies
Now let’s check the process of calculating crypto gain and loss.
- First, you want to find the cost basis for your property. Cost basis is the amount of money you utilized to purchase the property. In the case of crypto, a cost basis includes all the costs you used to purchase cryptocurrencies like transaction fees, broker commissions, etc.
- In order to determine your crypto gain or loss, subtract your cost basis calculated as above from the fair market value. The formula is,
Crypto loss (or gain) = fair market value – cost basis
Problems and Solutions of Crypto Taxes
The main problem of crypto taxes is that integrating all your cryptocurrency data of buys, sells, trades, exchanges, etc are difficult. Now several tools that integrate all these data into one platform are available. They aggregate all your historical trading data by coordinating with your exchanges. The tax engine will then generate all the necessary tax files. These tools are secure and easy to use. Users can easily upload the tax files generated into the tax software.
A lot of conflicts occur on the topic of crypto taxes. This makes common people confused. This article mainly focused on crypto tax obligations. IRS considered the crypto as a property, and this makes the buying and selling of crypto taxable. Failing to pay crypto taxes results in interest on unpaid taxes and penalties. Albert Einstein quoted that “ The hardest thing to understand in this world is the income tax”. Taxation is considered as the price in which civilized communities pay for opportunities of remaining civilized. Make sure you pay your taxes, otherwise you can get in a lot of trouble.