Cryptocurrencies have earned their share of marketspace, but still, when it comes to legal and regulatory norms, the industry lags significantly. The governments around the world are working together to chalk out a system that clearly defines the regulatory guidelines, legal ifs, and buts, as well as tax implications related to cryptocurrencies. Filing of tax is not just a legal duty for a person living in any part of the world but is a moral obligation of one towards his or her country. As the financial year comes to an end, taxpayers find themselves in a confusing state because they fail to understand the tax implications related to their crypto winnings and losses. There have been several instances where people and governments found themselves in a troubling situation concerning the crypto tax requirements.
In the United States of America, the Internal Revenue Service classified cryptocurrencies as property and not currency or security. Considered to be a property, these virtual currencies attract capital gains and losses when traded off.
For tax implications, one needs to know the original value of their crypto assets as well as the Fair market value of the crypto at the time of the trade. Then, subtract the original value from the fair market value and the resultant is your tax value. The list given below describes the accounting for various crypto activities:
- In case of capital gains, if an asset is held for a year or less earns profit, then it is taxable as a short-term gain, and if the asset is held for more than a year-long span, then the profit earned is termed as a long-term gain. The owners who hold a coin for profit rather than amusement, then a loss on such assets, is deductible as a capital loss.
- As per IRS, the income earned at the time of fork is to be taxed at high ordinary-income rates.
- Crypto sold for cash, traded for another crypto, or used to purchase any product or service shall be considered for tax purposes.
- A transfer of an asset from wallet to crypto or vice versa shall not be included as taxable transactions.
- In case of a loss, the owner can claim the loss irrespective of the time of purchase, as is the assessment in the case of securities.
- Any sort of income earned through crypto mining, as well as the process of crypto staking used by crypto exchanges, is deemed as ordinary income.
- Cryptocurrencies given for charity purposes are treated as gifts of stock worth more than $5,000 require appraisals in case the asset is held for a period of more than a year. If the asset is donated after holding it for less than a year, the deduction is limited to the cost.
After assessing your capital gains/losses, the investors need to report their gains and losses in the Schedule D form. Before filling out the Schedule D, the investors have to give details of your trades in the 8949.
Tips for reducing tax implications on crypto trades
- Try to hold your crypto assets for more than a year-long as this will put you into the long-term capital gain tax bracket, which is comparatively lower to short-term tax rates.
- To reduce the tax burden, you can invest your crypto capital gains into a registered opportunity zone fund. On selling an asset that accrues capital gains, the investor can further put the profits into an Opportunity Zone Fund within 180 days of the trade. The investor will then be allowed to write off the capital gain implication on that amount until December 31, 2026, or until the Opportunity Zone Fund investment is sold or exchanged, whichever comes first.
- Choose a specific identification costing method for the assessment of gains and losses. Under this method, the investors specifically identify and sell the crypto assets that they purchased for the highest price value. A slight change in the value can help you enjoy a big bucks tax saving in a transaction.
- Open a crypto401(k) or an IRA retirement account. These help in shielding profits from the tax implications.
- Employ a cryptocurrency tax software that is studded with tools to analyze and optimize the gains and losses, thereby cutting tax costs.
Top 5 Crypto Tax Software
- ZenLedger- The platform helps the investors to import crypto transactions, assess profits and incomes derived, and facilitates auto-filling of tax forms for filing purposes. ZenLedger is quite popular in the market owing to its user-friendly interface, quick speed, and economic nature.
- BearTax- It imports the transaction data using its ‘smart matching’ algorithms with more than 25 major exchanges to assess the gains. The interface is simple and transparent. It provides export documents that can be filed with your documents during tax filing.
- CoinTracker- The platform shines as a hybrid crypto-asset tracker and tax reporting software. It automatically syncs the asset balances and transactions from the exchange accounts or local wallets used by the investor. This helps in getting the latest information about all your cryptocurrency activities.
- tax- The super-fast speed of the software helps the crypto users to assess their capital gains/losses in minutes. It offers a systematically designed interface to the investors making import of trades convenient.
- TokenTax- Forbes listed it as the best platform for filing cryptocurrency taxes. TokenTax supports all the major crypto trading exchanges on its network, which helps in the quick import of trading data. After collection of all the transactions, TokenTax generates all the tax forms needed for filing the tax, including 8949, TurboTax, FBAR, FATCA, etc.
- myCryptoTaxCalculator- It is a simple, user-friendly, and economic crypto trading software. It helps in calculating the tax and also aids in filing out the crucial information in tax forms.
If you are looking for a platform that could help you in earning sure shot profits in crypto trades, then Bitcoin Code is your perfect partner. The revolutionary trading software allows the investors to make the maximum out of the wide range of opportunities available in the market, read the full info here. It uses advanced algorithms to initiate both automatic as well as manual digital currency trading on behalf of its users.
Tax payment is the responsibility of all the citizens living in a country as it helps in the development of a nation. Where tax filing is obligatory, tax planning is also equally important for the payers because it helps them in reducing the tax burden on their shoulders. The tax requirements on cryptocurrencies often trouble the owners owing to the lack of clear guidelines. This article enriched the readers with all the insights into the crypto tax world so that you can enjoy crypto trading in the best possible way.