Crypto and Taxes: What You Need to Know

Crypto Coins

As cryptocurrencies continue to gain popularity, internet-savvy people are trying to understand them better to be able to invest in them and gain from them. Now that there are a lot of people earning money from cryptocurrency, the Internal Revenue Service (IRS) has released several guidelines for reporting cryptocurrency transactions. Failing to comply with these guidelines can lead to penalties or even legal trouble.

If you need help with your crypto taxes, seek help from a certified public accountant in Kearny, NJ, who’s well-informed about cryptocurrency. For your insight, here's what you need to know about crypto and taxes:

  1. Cryptocurrency is Considered Property for Tax Purposes
    According to the IRS, cryptocurrency is not treated as a currency but as property for tax purposes. This means that each time you buy or sell cryptocurrency, you are essentially selling property. Any gains or losses will be subject to your capital gains tax. If you invested in cryptocurrency and are holding it as an investment, you will need to indicate that on your tax return. If you are buying and selling you need to report your transactions on your tax return. This consists of any gains or losses.
  2. Crypto Transactions must be Reported
    When it comes to tax returns, just like any other investment, you are also required to report your cryptocurrency transactions. This includes any sales or exchanges, as well as any income earned through mining or staking. Keep in mind to report the fair market value of the cryptocurrency in U.S. dollars on the date of the transaction, as this is required by the IRS.
  3. Crypto Gains and Losses are Subject to Capital Gains Tax
    As mentioned, any gains or losses on cryptocurrency transactions are subject to capital gains tax. If you are holding cryptocurrency for less than a year before selling or exchanging it, you will be subject to short-term capital gains tax, which is taxed at the same rate as your main income.
    If you hold cryptocurrency for more than a year, you will be subject to long-term capital gains tax, which is typically lower than the short-term rate. It's a bit complex, isn’t it? This is the reason why understanding cryptocurrency and taxes is important.
  4. Forks and Airdrops are Taxable Events
    A fork occurs when a cryptocurrency splits into two separate currencies, while an airdrop is when a new cryptocurrency is distributed to existing holders of another cryptocurrency. Both forks and airdrops are considered taxable events by the IRS; therefore, you will need to report your gains or losses.
  5. Crypto Held in Offshore Accounts must be Reported
    Even if you are holding your cryptocurrency in an offshore account, you are still required to report it on your tax return. If you fail to file a report, you will receive penalties from the IRS and even criminal charges.
  6. Proper Record-Keeping is Essential
    To accurately report your cryptocurrency transactions, you must keep detailed records of all purchases, sales, and exchanges. This includes the date of the transaction, the amount of cryptocurrency involved, and the fair market value in U.S. dollars at the time of the transaction.
    Without keeping a proper record, you may not be able to accurately report your gains or losses, which can lead to penalties or legal trouble.
  7. Crypto Losses can Offset Gains
    Like any other investment, you can use losses on cryptocurrency transactions to offset gains. Therefore, if you have a net loss on your cryptocurrency investments, you can deduct that loss from your taxable income. This can help reduce your overall tax liability.

This concludes that understanding the implications of cryptocurrency and taxes is crucial for anyone who buys, sells, or holds digital coins. By properly reporting your transactions and keeping detailed records, you can avoid penalties and legal trouble while also ensuring that you are accurately reporting your gains and losses.

If you have questions about how cryptocurrency affects your taxes, it's always best to consult with a qualified tax professional who can guide you regarding your crypto taxes. Look no further than Nicholas J. Coco, CPA, an expert when it comes to taxes. Call him at 201-955-3100 to book an appointment.