Ever since the IRS introduced a new question in their Form 1040 that essentially required taxpayers to declare whether or not they’re engaged in cryptocurrency trading, many crypto traders have been wondering what this means for them. Below is a roundup of answers to common crypto tax questions to help you navigate this unfamiliar territory.
#1 How are cryptocurrencies taxed?
Virtual currencies are treated as property. In most countries, cryptocurrencies are considered capital assets, which means that the assets appreciate after trading or selling them. On the other hand, if the asset depreciates, which means that you sell them at a loss, you may be able to reduce your taxes.
#2 Where are cryptocurrency taxes applicable?
In the United States, citizens and residents are required to report all of their earnings, whether earned within the country or overseas, as they are subject to a worldwide income tax. However, tax regulations may vary from state to state, so it’s best to familiarize yourself with them beforehand.
#3 Are gifted cryptocurrencies taxable?
Generally, cryptocurrencies that are given as a gift or tip are not taxable unless you sell, trade, or dispose of the virtual currency. This means that the recipient will not have to report this in their annual income tax return. The recipient will only have to pay capital gains taxes once he/she sells the gift at either a capital gain or loss.
#4 Can you enjoy fewer taxes if you lost money while trading?
Yes. If you realized capital losses from trading crypto, these losses can offset capital gains. For instance, if you gained $10,000 but lost $10,000 trading cryptocurrencies, your loss would entirely offset your $10,000 gains. But if you only realized losses for the year, you can deduct the amount from your income. For example, if you made $30,000 in income for the year and realized a $2,000 loss on cryptos, only $28,000 would be taxable.
#5 What should you do if you failed to report your crypto transactions?
If you failed to report your cryptocurrency transactions in previous years, you must file an amended tax return to rectify the numbers. Remember, the IRS can be very meticulous when it comes to crypto non-compliance. It’s best to amend your tax returns and not wait for the IRS to send you a notice.
#6 Do you need to report cryptocurrencies earned as wages?
Yes. When your employer pays your wage via cryptocurrency, you need to report this income using the fair value of the virtual currency at the time when you earned it. The fair value of crypto is influenced by factors including supply and demand, competing cryptocurrencies, etc. Crypto tax software can show you the historical values of cryptos.
#7 Is transferring cryptos between wallets/platforms taxable?
Transferring cryptocurrencies between wallet, DeFi, exchanges, and other platforms is a non-taxable event. This is because you aren’t technically trading cryptos since all of the destinations are yours. However, you would still be required to check “yes” on Form 1040.
Is there more?
Governments around the globe are becoming more serious when it comes to taxing cryptocurrency transactions. To ensure that you aren’t committing tax fraud, you should consider setting an appointment with a tax professional or checking your country’s tax regulations.