Many people got involved in buying and selling cryptocurrency over the course of 2020 and 2021, and this trend is here to stay. However, what many people don’t realize is that buying and selling cryptocurrency can impact their tax bills. What should you know about cryptocurrency and taxes before making your next trade?
Understanding Cryptocurrency and Taxes
Capital gains tax rules that are applied to buying and selling stocks are also applied to cryptocurrency. The IRS considers all cryptocurrency assets capital assets, so whenever you sell them for a profit, you must pay taxes on the amount. Just like when buying and selling stocks, when you consider cryptocurrency and taxes, you will be taxed in different amounts depending on whether or not you held the coins for 12 months. Cryptocurrency bought and sold within a 12-month period will be subject to short-term capital gains tax rates, while coins bought and sold over 12 months later will be taxed at a long-term capital gains rate.
Unique Concerns for Cryptocurrency
Because cryptocurrency changes in value constantly, whenever you make a purchase with cryptocurrency, it counts as the sale of that coin. If you spent $100 USD worth of crypto on something and you paid $50 USD to acquire the currency initially, you would owe tax on the fair market value of the crypto on the day that you received it and that $50 counts as part of your taxable income.
If you mine crypto or receive it as payment for goods and services, that also will count as part of your taxable income. The IRS will expect you to pay taxes on the fair market value of the crypto on the day that you earned or received it. In the future, once you sell it, you will then be subject to capital gains taxes.
How to Prepare for Filing
It’s a good idea to work with an accountant if you are concerned about cryptocurrency and taxes. To prepare, you should:
- Keep detailed records of all of your transactions, including how much you paid for coins, how long you held them, and how much you sold them for.
- Be prepared to complete the relevant tax forms, including Schedule 1 for crypto mining as a hobby, Schedule C for cryptocurrency received through mining for business, Schedule D for capital gains and losses, and Form 8949 for your purchases and sales
Overcome International Tax Challenges with Help from MKS&H
MKS&H provides tax and accounting services to businesses of every size and in every industry. We can work with you to make international taxes easily and avoid the most common international tax challenges. Contact us today for a consultation.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.