While crypto’s are still relatively new, they are, at the end of the day, just like every other investment. Therefore, means if someone invested in cryptocurrency and profited, they will have to pay taxes on the said earnings.
Even though cryptocurrencies can experience rapid volatility that makes monitoring profits and losses difficult, they must still report any earnings to the Internal Revenue Service (IRS).
As per the IRS, even an “innocent mistake” can lead to expensive fines. In the past, the IRS has been unusually slack in enforcing taxes on cryptocurrencies. However, the organization is now addressing the matter with newfound energy.
Taxpayers must now tick a box on their 1080 tax form to declare whether or not they have indulged in any cryptocurrency activities. The IRS has also been paying more interest to cryptocurrency exchanges, which is one of the reasons the agency has hired a slew of additional auditors.
Having this in consideration, 2022 is not the year to push one’s fortune by neglecting to report cryptocurrency profits.
IRS Capital Investment
Since the IRS considers cryptocurrency to be a capital asset, they must tax profits. That is, if someone acquired a cryptocurrency at a low price and resold it at a higher price, it will be similar to a stock.
Short-term capital appreciation taxes will be levied on currency investments held for one year or less, and long-term capital gains taxes may be levied on investments held for more than one year.
According to GoBankingRates.com, the long-term capital gains tax rate is more advantageous for most taxpayers, as it rises at 15% on most transactions. The long-term capital gains rate is 0% for individual taxpayers with an AGI of $40,400 or less – or $80,800 or less for joint filers. Conversely, short-term capital gains have taxes at the individual’s ordinary income tax rate.
Taxes may be due on cryptocurrency trades in addition to taxes on revenues generated from selling the assets. Whereas the IRS may not tax people for using their money on most purchases. It considers cryptocurrency purchases to be a sale of cryptocurrency. So, if a cryptocurrency values at more than it was when you purchased it, any transaction represents a taxed gain.
Taxable Cryptocurrency Events
If a person exchanges one cryptocurrency for another, they must record any earnings in USD on their tax return. When an individual trades cryptocurrency, they must keep track of how much money they make or lose in USD. As a result, one can appropriately report their cryptocurrency earnings or losses.
Furthermore, since cryptocurrency exchanges are still in their infancy, few, if any, will give year-end tax information. The same was apparent in the initial stages of stockbroking, as GoBankingRates pointed out. Whereas most traditional brokerage companies give transaction data to their consumers, few crypto exchanges do. As a precaution, one should keep careful records of all their cryptocurrency transactions.
Crypto Miners Taxation
Mining payouts are taxable income for individuals who “mined” the cryptocurrency to acquire coins or tokens. Even if the rewards are not traded. If a miner sells a reward later, the miner may be subject to capital gains taxes. This is if its price rose after they acquired it.
However, for individuals who mine as a business rather than a pastime, mining expenses such as computers, electricity bills, repairs, and even rental premises required to run the equipment can be deducted. Those that mine from home may need to utilize a different meter to correctly calculate the energy use for mining.
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