Cryptocurrency and Taxes: What You Need to Know

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Negosentro|Cryptocurrency and Taxes: What You Need to Know|If someone told you even a decade back that someday you would be paying digital currency for buying something online, you would have laughed. And if the same person said to you that it would become an international phenomenon worth billions of dollars in real-world money, you would have probably shaken your head in disbelief. But for the thousands, who deal in cryptocurrency today, it is no longer a laughing matter, and there are government regulations and taxes in place. 

In today’s article, we will give you a better understanding of cryptocurrency taxes and how to file them to avoid any legal complications down the line.

Cryptocurrency Explained

For the uninitiated, let’s start by giving you a basic understanding of cryptocurrency. Even if you’re not using cryptocurrency at present, according to experts, it will likely become commonplace over the next few years. So knowing the basics of the matter and how people make money with it will definitely come in handy for you.

In plain terms, cryptocurrency is an encrypted digital currency that exists in digital space. It is generated by using blockchain technology, and due to the usage of cryptography techniques (elliptical curve encryption, public-private key pairs, hashing functions, etc.), it cannot be counterfeited. The immense rise in popularity when it was first introduced was due to the fact that since it existed virtually, it was beyond any national or international jurisdiction, but that is changing fast. There are various forms of cryptocurrency, the most popular of which is Bitcoin, the first of its kind.

Initially, cryptocurrency was designed for secured online payments, acting as ‘tokens.’ But since then, it has gained widespread use. Most people make money with cryptocurrency by buying and selling similar to stocks, ‘mining’ cryptocurrency, and micro-tasking. Though the cryptocurrency market is volatile, it is also highly profitable. 

Why is Cryptocurrency Taxed?

Due to its anonymous nature, cryptocurrency has gained much flak from financial and legal authorities. Key reasons include the volatile nature of the currency valuation, lack of infrastructure quality control, and high use in illegal activities, mainly money-laundering and tax evasion. This lack of control is partly thanks to how to blockchain technology is organized- separate networks of computers that mine and encrypt cryptocurrency. To put a lid on the chaos, government organizations around the world started to tax and regulate cryptocurrency, including the IRS.

How to File Crypto Taxes

With the upcoming tax season right around the corner, the last day being April 15, 2020, it’s high time you learn how to file crypto taxes. Cryptocurrency has been classified as property since 2014 by the IRS, and as a taxpayer, you must report your cryptocurrency property on your tax returns. If you have been dealing in cryptocurrency since all the way back then, the bad news is that you have a couple of accumulated cryptocurrency taxes to pay up. The IRS has been calling up people with cryptocurrency transaction records since last year, specifying them to file amended returns and pay back taxes.

For filing your cryptocurrency taxes, you will need Form 8949, and Form 1040, which is also known as Schedule D. Form 8949 is typically used to reporttransactions made by selling or exchanging capital assets. This report also has to include gains and losses from both long-term and short-term transactions as well. The first part of the two-part form is for short-term transactions, while the second part is for long-term transactions. Both parts have three boxes that must be filled out. This just pertains to cryptocurrency transactions. If you are making money off cryptocurrency, then Form 1040 enters into the picture.

Form 1040 is used to file reports for capital gains and losses for individual tax returns. If you’re not familiar with the term, capital gain refers to the increase in the value of an asset over-time in the market. In the past, it was limited to the forex, stock, and commodities market, but recently cryptocurrency has joined the group as well. The first part of this two-part form is used to provide personal information of the taxpayer (name, address, Social Security number, the number of dependents). The second part is the income section, which is used for reporting your wages, salary, taxable interest, capital gains, pensions, social security benefits, and other income sources.         

Hopefully, this article will be of immense use to you whether you are already doing cryptocurrency transactions or not. The days of the wild west in the digital frontier is over, and it’s best to avoid legal complications by following the rules. And hopefully, this article will help you to do just that.

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