“People still think that cryptocurrencies are invisible to regulators,” Chandrasekera told CNBC Make It. “The truth is, there are many ways for the IRS to know that you have had any interaction with cryptocurrencies.”
In fact, not reporting income, gains, and losses from cryptocurrency trading on your taxes can have severe consequences. This can include audits, fines, interest on unpaid taxes, and even possible criminal charges.
Please remember. The IRS expects you to report all taxable cryptocurrency transactions throughout the year on your tax return, regardless of the amount of profit.
If you use a centralized exchange like Coinbase and make more than $600 in a given year, the exchange will send a 1099 miscellaneous form to both you and the IRS.
However, crypto traders who use centralized exchanges find it difficult to accurately determine their crypto returns, profits, and losses, especially if they trade on multiple exchanges and are trading from their own self-custodial wallets. Chandrasekera says you shouldn't rely solely on those companies.
“These exchanges only have visibility into what is happening within their platforms,” he says. “Most of these tax forms may be incomplete or inaccurate because the exchanges do not know what the taxpayer is doing outside of the exchange.”
Therefore, it is important to keep accurate records when reporting your crypto earnings to the U.S. government.
It's up to you to keep track of all profits and losses.
However, it can be difficult to keep track of each cryptocurrency transaction and the value of different coins at the time of buying and selling.
Cryptocurrency tax software tools like CoinTracker and Koinly can help you keep an accurate record of your crypto activity and automatically generate the appropriate forms you need when filing your taxes, says Born Fido, certified financial planner. Wealth President Douglas Vonepers speaks to CNBC Make. that.
According to the IRS website, the IRS treats virtual currency as property for federal income tax purposes. This means that cryptocurrencies incur capital gains and losses and are generally taxed at lower rates than ordinary income.
Let's say you bought a cryptocurrency during the year and then sold it for a higher price than you paid for it. When tax time comes, you will be liable to pay capital gains tax on the profit you make on the sale. For example, if you buy $100 worth of cryptocurrency and then sell it for $300, the $200 gain is subject to capital gains tax.
Cryptocurrency may be subject to both short-term capital gains tax when selling a virtual currency held for less than one year and long-term capital gains tax when selling a virtual currency held for more than one year there is. one year.
If you buy a virtual currency and then sell it for less than the price you paid, it is considered a capital loss.
If the capital loss exceeds the annual capital gain, the IRS allows the investor to reduce their ordinary taxable income by up to $3,000 per year, depending on the severity of the loss. For example, if losses exceed profits by $500, he can deduct $500 from his ordinary taxable income.
For more information on how to file taxes if you own crypto assets, please see the IRS FAQ.
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