Decoding Crypto Taxation: Understanding the Implications for Investors

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Article Summary: This article on Cryptocurrency Taxes discusses the possible tax consequences of your Cryptocurrency investments, attempting to resolve various tax issues. The purpose of this section is to provide information about your tax obligations as determined by US law. This post first appeared on Reddit.

Cryptocurrency Tax Implications

Based on the rapid rise in popularity and price of Bitcoin and other cryptocurrencies (especially over the past year), I expect many people to have questions about how cryptocurrencies will affect their taxes.

Cryptocurrency: Decoding The Taxation Policies

Please note that this article attempts to provide information about your tax liability under US law (and as interpreted by the IRS under the direction of the Department of the Treasury).

It’s understandable that a certain segment of the crypto community tends to view crypto as “tax-free,” given the difficulty (real and perceived) of the IRS “finding out” about the transactions involved.

This article will not discuss the illegal hiding of crypto profits here, nor will it suggest illegal tax evasion activities.

This introductory section is good for those unfamiliar with taxes. It covers basic tax principles and assumes that all you did during the year was buy/sell a cryptocurrency.

The Pros And Cons Of Accepting Cryptocurrency As Payment

Basically, the IRS doesn’t treat crypto as money, but as an asset (investment). While there are some specific “cracks” when it comes to crypto, once you replace the word “crypto” with “stock” once and for all, you’ll have a good idea of ​​how to report and pay taxes on crypto.

The first thing you need to know is that most of this discussion applies to the taxes you are dealing with today (2017 taxes).

The newly passed tax bill applies to 2018 taxes (with very few exceptions), most of which will be filed in early 2019.

Generally, you don’t have to report or pay taxes on your cash holdings until you “cash out” some or all of your holdings.

Cryptocurrency For Accountants Part 3 Tax Implications

For now, I’m going to assume you’ll make money selling in USD; however, other rollback methods will be explained later.

When you sell crypto, you report the difference between your basis (the purchase price) and your proceeds (the sale price) on Schedule D.

Your purchase price is known as your basis; Although the two words do not mean the same thing, they are very close

In particular, there are three ways to calculate your basis: the average cost, the first method, the first, and the “ID specific” method. See more about these here and here. You cannot use the cost averaging method with crypto – see here.

Is Swapping Crypto For A Loss A Taxable Event?

If you sell at a profit, this profit increases your tax liability. Otherwise, if you sell at a loss, that loss will reduce your tax liability (in most cases).

If you trade multiple times throughout the year, you’ll report each transaction individually (bad news if you trade frequently!), but add up all your gains or losses to determine how the transactions affect your income.

An important thing to remember is that there are two different types of gains/losses from an investment: short-term gains (if you held the property for a year or less) and long-term gains (more than one year; ie, 1 year. and 1 year). days).

Short-term earnings are taxed based on your minimum income (basically, as if you’d earned the money at work), while long-term earnings are paid at lower rates. Here’s a Guide to Cryptocurrency Accounting: What? How do I calculate my Crypto earnings?

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