When you buy or sell cryptocurrencies, you’ll have to report them as income on your taxes. It’s different than selling stock, so this type of tax is different as well. You will report the value of the cryptocurrency as the fair market value of the asset on the day of receipt. You’ll also have to report any capital gains you make.
Fortunately, there’s software that will do the math for you. The IRS has created a tax form for digital currencies and you can use it to figure out your tax liability. You can also calculate your cryptocurrency tax using a tool like CoinTracker, or you can consult an accountant. You’ll also need to obtain an IRS Form 1099-K from your broker-dealer. Broker-dealers will keep one copy for themselves, while exchanges will send one copy to you. The form will also show the amount of transactions that you made over a given month.
While cryptocurrency tax reporting is complicated, most centralized exchanges that operate in the U.S. have good data management practices and can send you the right tax forms. The key is to keep detailed records of your trades and transactions. This way, you can get the right tax forms without having to worry about the complexity of the process.
The tax rate for cryptocurrency varies depending on how long you hold it. If you held your cryptocurrency for more than a year before selling it, you’ll have to pay long-term capital gain tax rates. These are typically lower than short-term capital gains. This type of cryptocurrency tax is only taxable if the value of the cryptocurrency has increased significantly. When you’re selling your cryptocurrency, you should use the cost basis to determine how much you actually paid for it.
However, there are some legal challenges when it comes to taxation for cryptocurrency. While the crypto field is new and evolving, it is still unclear how tax authorities will handle it. Many of them are still playing catch-up and working on ways to establish cryptocurrency tax rules. A good way to avoid tax penalties is to disclose the amount you earn using cryptocurrency.
The IRS released new cryptocurrency tax guidance on October 9, 2019, which is retroactive. This new guidance applies to new coins received through hard forks. For example, when Bitcoin Cash hard-forked on August 1, 2017, new coins were created. Those who held Bitcoin Cash at the time of the hard fork are responsible for reporting the new coins and paying income tax on them.
The new IRS rules on cryptocurrency may help cryptocurrency owners avoid tax penalties. This is because the new law includes cryptocurrencies and digital assets in the definition of “digital assets” and makes them subject to Form 1099-B reporting.