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Cryptocurrencies such as Bitcoin have grown in popularity in recent years. A bitcoin tax guidance should be common knowledge. They are not only utilised as a means of commerce, but also as a store of value. As a result, the IRS has been developing methods to encourage consumers to disclose and pay taxes on cryptocurrencies. If you’re curious about how cryptocurrency taxes work, here’s everything you need to know.

What Exactly Is Cryptocurrency?

In essence, bitcoin is digital money. It is a form of virtual currency that can be used to purchase goods and services. Some individuals invest in cryptocurrencies. (However, some argue that investing in bitcoin is only speculation.) Bitcoin is one of the most well-known cryptos. Other cryptocurrencies include Litecoin and Ethereum, but the IRS handles them all the same.

If you wish to trade cryptocurrency, you need be aware of the tax implications. Let’s go into the specifics.

What Is the Taxation of Cryptocurrency?

In general, cryptocurrency is taxed in the same manner as traditional property, like as real estate and equities.

Capital Gains: Short-Term vs. Long-Term

To begin, it is critical to realise that bitcoin is considered in the same way as stocks and other capital assets are.

  • When purchasing a cryptocurrency, keep track of the date and market value. If you retain the cryptocurrency for a year or less before selling or using it, the transaction results in a short-term gain or loss. Using a tracker like Personal Capital is an excellent method to keep track of the price. With their Cryptocurrency BETA tracker, you can keep track of the performance of your cryptocurrency as well as your other assets.
  • It is a long-term capital gain or loss if you hold the cryptocurrency for more than a year. Then your cryptos are eligible for the better long-term rate. Maintain a record of your transactions so you know where you stand.

You can also file a claim for losses. You can deduct your bitcoin loss from your other income up to $3,000 per year if you sell it at a loss.

Cryptocurrency Events That Are Taxable

It is critical to understand which crypto transactions are taxed. These are some examples:

1. Converting your bitcoin into fiat currency (like U.S. dollars)

2. Returning your cryptocurrency and exchanging it to a different cryptocurrency

3. Using a cryptocurrency to purchase products or services

4. Interest on cryptocurrency transactions, particularly those conducted through decentralised finance platforms and crypto lending

When you purchase the cryptocurrency and complete the transaction, you must know the market worth of the cryptocurrency in US dollars. Your gain or loss is determined by the difference between those figures.

Assume you purchased a bitcoin in February 2019 when it was worth roughly $3,500. You want to sell that Bitcoin for $9,500 now. Because you’ve had it for more than a year, your $6,000 gain is taxed at a lesser rate than you would normally pay. However, you are still taxed on the gain.

What About Cryptocurrency Mining Taxes?

Many people wonder if Bitcoin is taxed once it has been mined. Yes, the answer is yes. Any cryptocurrency received as a form of income is taxed as such. So, when you mine cryptocurrency and receive your token, you must convert it to its fair market value in US dollars to compute your income and pay taxes on it.

Taxation and Cryptocurrency

Paying bitcoin taxes might be difficult due to the difficulty of record-keeping. Here are some things to keep in mind while dealing with crypto taxation:

Calculate the Value of Your Cryptocurrency

When utilising cryptocurrencies, it is critical to keep meticulous records. Keep track of the market value of your cryptos when you buy them and use it to calculate your cost basis. This may be accomplished by using the following formula:

(buy price of cryptocurrency + transaction fee) amount of cryptocurrency = cost basis of one cryptocurrency unit

How Do I Submit My Crypto Taxes?

The IRS has increased its enforcement of crypto taxes. As a result, there have recently been significant modifications to how bitcoin transactions are handled.

To begin, if you look at the most recent edition of Form 1040, you’ll find that there is now a space to declare your bitcoin profits and losses, as well as your cryptocurrency income.

How Do I Submit My Crypto Taxes?

The IRS has increased its enforcement of crypto taxes. As a result, certain recent adjustments have been made to how bitcoin transactions are handled.

To begin, if you look at the most recent edition of Form 1040, you’ll find that there is now a space to declare your bitcoin profits and losses, as well as your cryptocurrency income.

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