By Stephan Knight
Cryptocurrency continues to evolve into a giant DeFi ecosystem. This breeds a healthy financial system for blockchain lovers, but the total freedom of activities may end soon.
Crypto Tax accounting increasingly dominates online crypto communities as it concerns every trader or investor. While some countries are yet to take on this trajectory, the U.S. and a few others are taking a serious stand against crypto tax evasion.
Why Crypto Tax?
You may ask, Why crypto tax? Cryptocurrencies are now classified as assets, hence, the tax on them by the IRS.
Crypto tax is a mandatory revenue levied on digital assets by the government. Considered a digital asset, the IRS treats cryptocurrencies like bonds and stocks.
Consequently, explorers of this DeFi world should now expect dues on crypto sales and investments. However, as this may discomfort some users, it also brings along a few enforcement procedures that this article cuts through.
Is Crypto Tax Compulsory?
This ushers in the regional imbalance in the enforcement of crypto tax. Although many countries have yet to recognize cryptocurrency as a legal unit, some countries that recognize it have yet to make it compulsory.
However, in countries like the United States, cryptocurrencies are treated by the IRS as properties and investments. So all transactions ranging from selling to purchasing, Tax implications of cryptocurrency is the same way as capital gains tax.
Knowing Your Crypto Tax Status
Like normal taxes, there is a specific time when crypto taxes are to be paid and when the IRS expects to get necessary returns.
However, there is an exception, and you may fall into the category. Buying virtual currencies in U.S. dollars and keeping them within the exchange does not warrant returns to be filed to the IRS.
If you only held crypto, you will not owe tax. That is not a taxable event. You must have realized a gain if you sell, trade, and dispose of your cryptocurrencies. Therefore, taxes must be charged on these gains.
Crypto Tax Forms: What’s The Catch?
Certain forms must be filled by an investor engaged in crypto transactions. There is no way around this. Interestingly, Crypto tax accounting software has come to ease this new responsibility on cryptocurrency users.
Determining the correct crypto tax forms ensures the correct filing of returns when due. The type of IRS tax forms needed include the 1099-K form, 1040 form to name a few.
Not all forms may apply to you, depending on your trading orientation for the year. These tips put crypto users through a broader understanding of these forms.
Taxable and Non-Taxable Crypto Transactions
Refrain from being caught in the web of confusion. It helps to know that there are taxable and non-taxable crypto assets and transactions.
An understanding of this will help you know the proportion of your income that will be subject to tax.
After determining if you owe, you can use a crypto tax calculator to estimate your potential tax liability for any cryptocurrency sales, purchases, or exchanges.
How Do NFTs Fair In The Loop?
Just in case you do not know, NFTs are also taxed. NFTs are non-fungible tokens made on a blockchain that demonstrates you are the sole owner of that unique digital property.
Investing in NFTs subjects your trade capital gains to tax. Trading one NFT for another, as well as exchanging NFT for cryptocurrency is regarded as a sale. Therefore, it is subject to capital gains tax (CGT).
Now it gets interesting. Tax on NFTs have a twist. Your tax liability may differ depending on whether you are a creator or investor.
If you need any help, a firm like Results Tax Accountants who specialize in cryptocurrency tax accounting can assist you and make your life a lot easier.
A good crypto CPA or tax accountant should be able to save you more in taxes than their fee will be!
The IRS Is Knocking: Preparing For Tax Preparation And Filing…
As expected, financial transactions that catch the government’s interest, may be subject to tax audits.
In preparing a crypto tax return, accounting for all your crypto activities comes first.
This can be a pretty demanding task, and probably the most consuming and crucial phase in the filing procedure. But the birth of crypto tax software reminds us it could get easier.
Here, forms come back into the discussion. It continues beyond calculating your profits and losses, which various platforms have made easy. In furtherance of the responsibility, you must fill out necessary forms and attach them to Form Schedule D.
It is crucial to turn in your paperwork, file returns, and pay taxes you owe before the deadline. Anything short of this would attract a penalty from the IRS.
Is Crypto Tax Accounting Software Worth It?
The essence of crypto tax accounting is to give accurate tax reporting. Traders and investors are mandated to disclose their gains and losses on Form 8949 of the IRS.
While this is an IRS requirement, proper Crypto Tax accounting also helps you avoid complications, especially when the agency has vowed to crack down on defaulters.
However, just as it is vital to avoid issues by filing a return, it is also essential to strive to give an accurate tax report. Tax reporting requires accurate and sound cryptocurrency tax accounting.
Hopefully, this piece has made reading about crypto tax attractive while preparing a pathway to get out of trouble and staying tax compliant (and legal) in your crypto journey.
About the Author
Stephan Knight is a nationally recognized, veteran Crypto Tax Accountant with 20+ years experience in accounting. He currently works at Results Tax Accountants, a firm specializing in helping individuals and businesses with their Cryptocurrency tax and accounting needs. He’s also a co-author of a FREE Crypto tax and accounting blog at www.ResultsTaxAccountants.com/blog.
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