Some people are pretty excited about cryptocurrency. The digital currency form is designed to work as an exchange medium that doesn't rely on central authorities, like governments or banks, to uphold it.
More cryptocurrencies are joining the new, yet crowded, marketplace every day, and some people enjoy trading them as they would traditional stocks. This is potentially profitable, though it also carries some risk.
If you're trading crypto, you might want to know how it could influence your taxes and whether you should report your gains or losses to the IRS. We'll discuss that right now.
How the IRS Looks at Crypto
Some people look forward to tax season because they suspect they're going to get a refund. Others might get hit with a hefty tax bill, and may need to look into tax debt relief if they can't pay it off all at once.
Whichever situation you're in, if you've been trading crypto, and you've made a profit off of it, you should understand how the IRS will view that activity. The IRS looks at capital gains as taxable, and crypto falls into that category. It's much the same as income you have to report if you've been successful in the stock market or if you've made a bundle through gambling winnings.
How to Report Crypto Earnings
If you made money through trading crypto and tax time is coming, it's your responsibility to report that income when you file. You brought in what the IRS considers taxable income, and not reporting it could trigger an audit and serious fines or even jail time if you get caught.
Albeit necessary, reporting crypto earnings can get a little tricky. While all a stockbroker has to do is file a form 1099-B, you can't do the same with crypto earnings.
You must connect all of your wallets and exchanges. A "wallet," as related to cryptocurrency, is a device that stores the private or public keys for the transactions you make. You use a wallet as a connector between your bank account and your chosen crypto trading site.
The IRS wants to know about your exchanges and wallets because that is how it can assess how much capital gains tax you owe from crypto trading. You can use IRS form 8949 to report crypto earnings and losses.
Hire a Professional
In many instances, you can do your own taxes if they aren't too complicated. Even stock trading is not particularly difficult to report to the IRS for the reason we already mentioned; it's a well-established practice, which is why the 1099-B form exists.
You will probably be better off hiring a tax expert and having them do your taxes for you if you have substantial crypto earnings that you're trying to report. If you keep track of all your crypto trading during the year, you can pass that information on to the individual you hired so they can sort through it.
You can always report your crypto earnings to the IRS yourself, but it's easy to make a mistake. For instance, it's not uncommon for crypto traders to purchase new cryptocurrency with crypto they already have. That can become tremendously complicated to report. It's not like a typical stock market transaction because market speculators usually pay for stocks with money, not other stocks. This is just one example of why bringing in a professional tax expert to handle a return involving crypto gains may make sense.
Be Sure to Report Any Crypto Gains
If you made money through crypto trading in the past year, that's fantastic, but be sure to report it if you want to avoid a potential audit. Remember that the IRS looks at crypto earnings as capital gains, so they are taxable. If your crypto trading is complex and uses multiple wallets and exchanges, consider hiring a professional to file your taxes for you.
Also, if you trade crypto, get in the habit of keeping careful track of those transactions. Whether you lose or gain money, you'll want to report that when tax season comes.
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Original Source: Credello: How Does Crypto Fit in With Your Taxes?
