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Entering the world of cryptocurrency, you're not just stepping into a digital gold rush but also a tax maze. The IRS views cryptocurrencies as property, which makes your crypto earnings and capital gains taxable. On the flip side, losses on crypto can also be tax-deductible, which might just be the silver lining in the cloud.
The crypto market took a bit of a tumble last year, with many digital currencies losing over half their value. Major exchanges, such as FTX, crumbled, leaving investors in the lurch. However, for those who lost money in crypto, there's a potential tax reprieve.
Crypto enthusiasts often extol the virtues of blockchain's decentralization. However, it's crucial to remember that Uncle Sam is also watching. The government is keeping an eye on who's pocketing what from crypto dealings. Every transaction customers make leave a trace on the blockchain, and many crypto exchanges report to the IRS.
The IRS handles crypto similarly to other assets, like stocks, subjecting them to capital gains and losses rules. When you get your hands on crypto or stocks, the initial purchase price or the cost basis comes into play. You're taxed based on the difference between the cost basis and the selling price.
Capital gains and losses are calculated based on the net total of all transactions for that year. Let's say you sold five different assets and made a total gain of $10,000 but suffered losses of $15,000 on three other assets. You'd have capital losses amounting to $5,000.
The IRS lets you deduct up to $3,000 a year in capital losses from your taxable income. Any losses that exceed this limit can be carried over to the subsequent years. So, if you had capital losses of $5,000 in 2022, you could lower your taxable income by $3,000 for that year and defer the remaining $2,000 to 2023.
Capital gains taxes vary based on the duration you held an asset before selling. Short-term capital gains taxes apply to assets you've held for one year or less, and long-term capital gains taxes kick in when you sell an asset after owning it for over a year. Your capital gains rate hinges on several factors and long-term capital gains are usually taxed at a lower rate than short-term gains.
If you use crypto for daily transactions, enlisting a tax professional may be a wise move. For the others, tax software offered by companies like H&R Block, TurboTax, and TaxSlayer can make filing taxes with taxable crypto transactions a breeze.
Crypto transactions are typically subject to capital gains and losses. However, in some cases, cryptocurrency is taxed as income, which can be subject to a marginal tax rate of up to 37% depending on your income level and filing status.
Now, let's delve into the various types of crypto transactions and their tax classifications:
- Selling cryptocurrency (capital gains): When you sell crypto, the gain or loss in value is taxable. This kind of transaction is generally straightforward, especially if you're not a frequent trader, and falls under capital gains.
- Exchanging one cryptocurrency for another (capital gains): A crypto swap occurs when you trade one cryptocurrency for another without exchanging it for cash. Many
people mistakenly overlook this type of transaction for tax purposes, but even trading Bitcoin for Litecoin or Ethereum for Bitcoin is taxable event.
- Spending crypto on goods or services (capital gains): Using crypto to purchase goods or services carries the same tax implications as selling it. Even small purchases like buying a coffee with Bitcoin can result in a taxable gain. The taxable gain or loss is based on what you paid for the cryptocurrency and its value at the time of the transaction.
- Earning cryptocurrency (income): When you earn crypto, it is deemed taxable income based on the value of the coins at the time of receipt. Examples of crypto earned as income include mining cryptocurrencies, crypto staking income, yields on crypto accounts, and crypto earned as regular pay or bonuses.
- Receiving free coins (income): There are instances where you may receive free crypto, and the value of the digital coins is considered income. Two common scenarios are airdrops and hard forks. When this happens, you'll have your original coin and a new coin with a separate value. The value of the cryptocurrency received from a hard fork is taxable income.
Let’s take the largest cryptocurrency exchange in terms of daily trading volumes Binance as an example of extracting your transaction history to evaluate what you have to report to authorities.
To download your transaction history from Binance, follow these simple steps:
- Log in to your Binance account.
- Hover over ‘Wallet,' then click ‘Transaction History.'
- Click ‘Generate all statements.'
- In the ‘Time' dropdown menu, select ‘Customize' to choose a specific date range.
- Ensure both the ‘Account' and ‘Coin' dropdown menus are set to ‘All.'
- Click ‘Generate.'
- Repeat the process for each date range until your entire transaction history has been exported.
- Upload the archived .tar.gz files to a suitable extraction tool to extract the CSV files.
It is worth noting that certain transactions require submitting a 1099-K form to the Internal Revenue Service (IRS). Additionally, you'll need to file Form 1040, commonly known as the US Individual Income Tax Return.
Binance offers services common to the majority of cryptocurrency exchanges, including trading, listing, de-listing and withdrawing cryptocurrencies. For more information about Binance’s operations and offers, feel free to check out detailed Binance review.
Navigating the labyrinth of cryptocurrency taxation requires a keen understanding of the various transaction types and their tax implications. It's essential to stay informed and seek professional help if needed to ensure accurate tax filings and avoid potential pitfalls.
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