Tax Considerations for Cryptocurrency Investors

Cryptocurrency trading activities may result in taxable events that must be reported. Gains and losses must be calculated using the difference between an asset’s fair market value in USD and its cost basis, when reporting gains/losses on taxes.

The IRS treats cryptocurrency as property, making any sales or exchange transactions subject to taxation. Therefore, it is crucial that accurate records of your fair market value and cost basis in US dollars be kept.

Taxes on Gains

Cryptocurrency investments and transactions are considered property for federal tax purposes, so any gains or losses must be reported on a return. Unlike with many investments, cryptocurrency losses do not count against capital gains; however, significant losses may be carried forward to later years if necessary.

As part of your tax calculations, when it comes to cryptocurrency trading you need to know its cost basis. There are various approaches for calculating it such as FIFO (First-in, First-out), HIFO (Highest-in, First-out), or specific identification, but the method you select could have serious ramifications on your taxes and so it is advised that professional advice be sought prior to selecting any method of calculation.

Make no mistake that failure to report investment earnings is both illegal and can carry serious financial repercussions. Not filing returns on time or providing inaccurate information may incur fines and interest payments; plus the IRS uses blockchain analytics to track digital wallet activity when they suspect tax evasion or money laundering.

Taxes on Losses

The IRS treats cryptocurrency as property and taxes its gains according to their fair market value at the time of sale or exchange – this applies for crypto-to-crypto trading as well as mining/staking rewards. Short-term capital gains may incur taxes of up to 37% while longer-term gains incur lower rates of taxation.

Cryptocurrency investors may use losses to offset gains or offset taxes due, so it’s crucial that they keep detailed records and report all income. The IRS accepts various cost basis methods – FIFO, HIFO and specific identification are some examples – so your choice could affect reported capital gains or losses.

Report any cryptocurrency-related losses, whether due to theft, scaling issues or other reasons. Previously investors could deduct these losses; however, due to Tax Cuts and Jobs Act disallowing this deduction it’s vital that investors stay on top of record keeping and reporting activities and consider digital asset management tools such as Blockpit to make this easier.

Taxes on Wages

The IRS mandates that investors report any gains or losses on cryptocurrency investments to them, since cryptocurrency is considered property by them and as such any capital gains tax must be applied accordingly.

Long-term cryptocurrency gains may be exempt from taxes if they were held for more than one year before selling, though short-term gains must still be subject to taxes unless transferred between tax-deferred accounts such as an IRA.

Under the new tax law, investors are no longer eligible to deduct losses related to stolen or lost coins, but casualty losses such as having their wallet compromised by hackers or losing tokens due to hard forks are still eligible deductions.

Your cryptocurrency purchases and sales must be properly documented, including calculating a cost basis. There are various methods you can use to do this such as FIFO (first-in, first-out), HIFO (highest-in, first-out), LIFO (last-in, first-out) etc. Each method may have serious tax ramifications so always consult a professional before selecting one of them.

Taxes on Exchanges

Gains or losses typically accrue when crypto assets are sold for cash, exchanged for another cryptocurrency, or used for goods and services. The IRS requires investors to document these cryptocurrency transactions for tax reporting, reporting any capital gains (or losses) as taxable events. A cryptocurrency’s cost basis — its total dollar price paid — must be subtracted from its sale price to calculate taxable profit or loss.

The IRS considers cryptocurrency to be property rather than currency and investment income from buying and selling crypto is subject to similar taxes as stock investments. Investors should consult a licensed tax professional for further advice regarding crypto-specific taxes; losses can often be used against profits through tax loss harvesting or donations to reduce an investor’s taxable income; alternatively, investors holding their crypto assets for extended periods can qualify for reduced capital gains tax rates.

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