Reporting Crypto Gains For US Tax Purposes

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Whilst the hullabaloo of issues like tax evasion, false asset declaration and others are ongoing, with the US Internal Revenue Services (IRS) trying their best to curb it, the issue has burgeoned on a decentralized scale. How? Thanks to the advent of cryptocurrency and it’s added wealth advantage, which has led a large number of persons into converting their assets into crypto. With the current grey areas on crypto and tax regulations, most US citizens have been left clueless or worried about what reporting their cryptocurrency assets for tax purposes should look like.

IRS has made it known that virtual currencies are taxable by law, they are considered as property and not currencies. They are deemed investments, because they have capital gains and losses. Hence, cryptocurrencies are properties and are taxable. What IRS has placed down currently can’t be seen as a regulation but as a guideline. Although, this guideline has caused a whole lot of reactions from taxpayers but since tax laws apply to cryptos, there are implications. Whether you are a US citizen, or just a resident making your crypto wealth from another country but living in the US, you are to report your crypto tax to IRS.

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The crypto world has a variety of career and passive income opportunities ranging from mining, airdrops,  programming, consulting and lots of others. Each of these opportunities, according to the guideline has classification categories. IRS classified the capital gains as long term gains and short term gains. Assets held for over a period of one year is long term and is taxed at 15% rate. Assets held shorter than a year are seen as ordinary income, and are taxed based on the returns which can be relatively high.

Buying bitcoin or altcoins do not necessarily need reporting, what you do with it after the purchase is what makes it taxable. These are a few crypto activities that requires reporting:

  1. Crypto spending: depending on the ‘hodling’ period, once a cryptocurrency is spent, returns get back to the spender as profit, no matter where or how it was spent. Hence, capital gains are taxable.
  2. Mining: mining crypto coins is rated as self employment tax, mining payment are block rewards in coins and can be huge. So, a miner is expected to report his/her mining assets.
  3. Airdrops: at the airdrop stage, it’s not taxable, but once they are traded or exchanged, tax is inevitable.
  4. Exchange/trading: traditionally,trading activities are taxable, same is applicable to the crypto world.
  5. Crypto to FIAT: converting cryptos to FIAT on exchange platforms do attract tax charges.
  6. ICOs: of course, this does not require much discussion. ICOs are investments for both contributors and the team.
  7. Developers: developers and several other career opportunities fall under employment tax, employers are expected to report employment taxes of their employees.

Traditional financial institutions are responsible for sending tax forms alongside asset statements, but in the cryptosphere, exchanges are digital. This makes it more complicated for taxpayers in the aspect of tax document compiling. One contributing reason is that, reporting crypto assets is “self reporting”. On the other hand, if individuals or organisations were to do this self reporting, the reports will end up being either over reporting or under reporting. Thankfully, Services like coinbase have released a Tax FAQ to help US citizens issue assets statements. The limitations of this tool are that investors must have accumulated a certain amount of crypto wealth and performed about 200 transactions.

Another accounting challenge faced by taxpayers include how to calculate loss or gains. To do this, take note of when you bought the coin, the amount used to purchase it, when you sold the coin and how much you sold it. Determining tax deductibles depends on if the coin is a capital asset to the investor. Cryptocurrencies held for investment purposes are deductible even if later sold. Whereas, deduction is only allowed for losses in a trade entered for profit. The form used in filling capital reports as a US citizen is the Schedule D.  

Investors must continuously and consistently carefully keep track of their assets, so to avoid future issues with IRS. Despite the warning, a report has shown that few Americans pay their crypto assets taxes. That the US government IRS only has a guideline for crypto tax, does not mean they cannot impose penalties and fines on defaulters. Thanks to the blockchain technology behind cryptos, tracking digital assets is easy as taxpayers can employ it to help declare correct assets and IRS can also track investors. So, it’s a two-edged sword, Blockchain  brings financial freedom, and also gives no hiding place.

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