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Cryptocurrency Taxation: Basics for Beginners

One of the most complex (and, at least in the U.S., most widely misunderstood) aspects of owning or trading cryptocurrencies is taxation. 

Given the likely interest of the world's governments in regulating the rapidly growing cryptocurrency market, cryptocurrency holders must follow internationally accepted guidelines to avoid sanctions and fulfill their tax obligations. 

In this guide you will find the basics of cryptocurrency taxation for beginners: how cryptocurrencies are being taxed, reporting obligations and the main guidelines for taxpayers.

Classification of Cryptocurrency

Now that we have gone through decentralization and taxation, it is important to know the classification of cryptocurrencies for tax purposes:

  • Property: Cryptocurrencies are treated as property in US, and are subject to property taxes (each trade is said to be taxable), just as if they were a car or a house) In other words, if you buy, sell or make transactions with a cryptocurrency and you have or could make a profit with them, you can be taxed in the same way as buying, selling or exchanging property, shares, forex or real estate.
  • Income: Some jurisdictions will consider the obligation of some bases for cryptocurrency transactions, like the income tax on its miner or the receipt of cryptocurrency as a part of payment for goods and services, as the means of presenting the amount of the level of the taxable profits. In those cases, the cryptocurrency's fair market value is included in the taxpayer's gross income for the tax year.

Taxable Events

Different types of cryptocurrency transactions can trigger taxable events such as:

  • Selling Cryptocurrency: Selling cryptocurrency for fiat currency or other cryptocurrencies creates a taxable capital gain or loss. The capital gain or loss is the difference between the purchase price of an asset (cost basis) and the sale price, and is considered taxable.
  • Trading Cryptocurrency: An exchange of one cryptocurrency for another (for example, exchanging Bitcoin for Ethereum) is also treated as a sale. You will need to use the fair market value of the third party cryptocurrency at the time you received it to calculate your capital gain or loss on your transaction.
  • Receiving Cryptocurrency as Income: Income received in cryptocurrency (such as payment for goods or services, mining, staking, airdrops, etc.) may be taxable. When the taxpayer receives the cryptocurrency, its fair market value at the time is recognized as part of the gross income in the taxpayer's hands.

Reporting Requirements

Taxpayers need to accurately report cryptocurrency transactions on their tax returns. 

Non-disclosure of the terms of your cryptocurrency transactions and/or errors in reported income can lead to severe penalties, fees, or criminal prosecution. 

The primary reporting requirement includes;

  • Form 1040 Schedule D: Taxpayers need to report cryptocurrency sales on Form 1040 Schedule D when they file their annual tax returns.
  • Form 8949: Taxpayers may have to complete form 8949 (Sales and Other Dispositions of Capital Assets) detailing only for each cryptocurrency transaction including the date of acquisition, sale date, the proceeds, and the gains/losses.
  • Additional Reporting Requirements: Depending on the taxpayer's jurisdiction and the complexity of their cryptocurrency transactions, additional reporting requirements may be owed, e.g., FinCEN Form 114 (Report of Foreign Bank and Financial Accounts) and Form 8938 (Statement of Specified Foreign Financial Assets).

Recordkeeping

You have to keep track of all of your cryptocurrency transactions in order to follow tax rules and report them accurately. That is why taxpayers will want to meticulously document all the following:

  • Purchase and sale dates and prices of cryptocurrencies
  • Wallet addresses and transaction IDs
  • Receipts, invoices, or payment records for cryptocurrency income
  • Mining or staking activity and associated rewards
  • Any other relevant documentation related to cryptocurrency transactions

Tax Treatment of Losses

In general, capital losses from the sale or exchange of cryptocurrency can be used to offset capital gains, which in turn can help to reduce the taxpayer's overall tax liability. 

Unused capital losses can also often be carried forward by taxpayers to reduce taxable capital gains in subsequent tax years (again subject to various other limitations and restrictions).

Seeking Professional Advice

With the realm of cryptocurrency taxation growing so rapidly and becoming increasingly hard to navigate, in the event there will be any investigations into your crypto assets, it is recommended to seek tax help from appropriate authorities, which will pay the felony money so that you can avoid as many problems down the road. 

Tax pros on trading report to offer individualized instruction, get around tax laws and supply conformity with filing prerequisites.

Conclusion

Crypto tax compliance involves classifying, recognizing taxable events, reporting, and record-keeping. 

Because tax laws vary from country to country, cryptocurrency holders must familiarize themselves with the regulations affecting them so as to honor their tax obligations properly. 

As the market trots along, proactive tax planning & compliance continue to be the cornerstone of warding off risk and staying compliant for investors and traders.

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