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A Brief Guide To Cryptocurrency Taxation

It looks like 2018 will be another phenomenal year for IRS because they will be able to tax cryptocurrency gains. This is even more so since Bitcoin had its moment in the spotlight and investors gained a fat return from in 2017. The IRS treats cryptocurrency as a property. Therefore, there will be capital gain implications. The best way to minimize taxes is to buy and hold them for more than a year. This also serves to reduce the speculative action within the market.

Undoubtedly, Bitcoin had a great time in 2017. The rise in the price of Bitcoin towards the end of 2017, was the highlight of the cryptocurrency world. More people are mining, spending, airdropping and also trading their cryptocurrencies. All of these transactions are most likely to be taxable for United States tax purposes.

Investors should be on the lookout for steps on how to file their tax returns for the cryptocurrency gains. In this regard, taxpayers should think ahead of time to file their tax returns and take note of all the cryptocurrency transactions that they engaged in. If you wait until the announcement is made, it may be too late for you to try and file everything.

This will help them to stay ahead of the IRS  to do their duty as law-abiding citizens. Moreover, the IRS is lenient on taxpayers who volunteer to pay their taxes on their own. Therefore, being vigilant and doing some extra work now will help you to stay ahead of your taxes.

In regards to taxing cryptocurrency, hundreds of investors have come forth to report their cryptocurrency gains each year since Bitcoin’s launch. However, it is suspected that many cryptocurrency users are still trying to avoid paying taxes by not reporting their cryptocurrency transactions.

Despite this, one of the reasons that people are hesitant to pay taxes is that the IRS hasn’t provided much information on how people can tax Bitcoin. In the US, cryptocurrencies are defined as property. Therefore, any transactions that traders get into will be subject to capital gain taxes. This has been a matter of concern especially for traders that did not keep details of all their transactions.

Today, there are nearly 2000 alternative coins in the market. Bitcoin isn’t the only cryptocurrency in the market albeit being the most popular one. Therefore, this article applies to the taxation of all cryptocurrencies. Let’s take a look at specific cryptocurrency transactions and see what the impacts on taxation are.

What if you trade cryptocurrencies on an exchange?

When you trade your cryptocurrencies, you will be subject to capital gains taxes. However, making losses on your transactions will reduce your taxes.

What if you mined the coins?

On the day that you successfully mine Bitcoin, it will be considered as an ordinary income which is equal to the fair market value of the coin.

Does swapping from Bitcoin to another cryptocurrency incur taxes?

In cases where you used Bitcoin to swap it into another alternative coin, this is also taxable. In fact, the taxation system views it as property being sold which will then subject you to capital gains tax. Similarly, losses will reduce your taxes.

What if you receive wages or payments in cryptocurrency?

If you receive your salary or any sort of payments in cryptocurrency, it will be treated as an ordinary income.

What if you received a cryptocurrency from an Airdrop?

This will be treated as an ordinary income on the day that the airdrop happens. When it is sold or exchanged, it can be considered as a capital gain.

What if you spent your cryptocurrency at a store?

This is a taxable event, and you may have gains or losses.

It is most likely that the IRS will be using the first in first out treatment. However, investors have the choice of using which method of taxing their cryptocurrency income for now.

 

How to reduce taxes: hold your cryptocurrency in the long-term

The best thing for you to do to minimize being taxed in cryptocurrencies is to hold them for more than a year. This will make you a long-term cryptocurrency traders. Longer term gains will be taxed at a reduced rate compared to short-term gains. Given the volatility of cryptocurrencies, a lot of people may not be going down this path as they want to cash in on the profits that they obtained. One year may be too long to wait. With exchanges, things get more complicated because they are not regulated by the IRS. Some exchanges don’t allow transactions in terms of dollars. Instead, it is a prerequisite for the trader to own cryptocurrency to do transactions on their exchange.

Hence, it is recommended that you keep track of all the cryptocurrency transactions that you did on an exchange or your own. This will help you a lot when you’re trying to file your taxes. The necessary details that you need to include for your file keeping are the date that you entered into the purchase, the value of the coins at the time exchanging and also the sales that you receive. You can also use software can help you to calculate your gains and losses from cryptocurrency transactions.

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