Many taxpayers believe that cryptocurrency income or ownership is tax-free. Cryptocurrency exchanges in the US are required to publish user activity, including gains and losses among users. They have the same tax structure as all other tradable securities or assets like property. Whenever you earn an income or make capital gains, you’ve to pay income taxes too.
If you are a self-employed person or independent contractor you’ll have a huge task of figuring your income tax brackets as well as your income tax. You can use a 1099 tax calculator to do that easily, this calculator will also help you segregate your income from crypto capital gains.
Is your cryptocurrency tax deductible?
Do you pay taxes on cryptocurrency, then? Cryptocurrency may be subject to the same taxes as traditional capital assets, such as those imposed upon the realization of gains or losses. For instance, if you purchase stock and it rises in value over time until you sell it for more than you paid for it (a capital gain), your net proceeds will be greater than your cost basis. The IRS wants its cut when this occurs with Bitcoin or another investment class like stocks or bonds; hence, they may view cryptocurrencies as taxable property.
Which prices apply?
Gains from cryptocurrency are typically taxed at a rate between 10% and 37%. Your tax rates will rise as your income does as well. However, there is typically a significantly lower long-term capital gains tax that applies if you hold onto cryptocurrency for a year or longer and then sell it later at rates of either 0%, 15%, or 20%, depending on how high-income earners are in contrast to others.
Penalties
After discovering a loophole that allowed some investors to conceal their earnings, Congress passed new legislation in November of last year requiring cryptocurrency exchanges and brokers to directly notify the IRS of bitcoin transactions. However, taxpayers’ misunderstanding of the entire taxing procedure is to blame for the inability to pay. Taxpayers must file their returns by April 18th or face penalties, interest charges, and maybe jail time. You can use FlyFin that sends you automatic reminders about tax deadlines and also helps you accurately file your tax returns and avoid tax penalties.
How can IRS taxes be written-off?
There are two ways to get around or pay less tax on cryptocurrencies. The first is the easiest to understand: if all you want to do is keep your coins until you pass away, tax authorities have nothing to take from you. However, the majority of investors hope to eventually benefit from their positions. By using losses from other assets and offsetting any gains made with them, one might reduce the taxation on cryptocurrency. For instance, if someone has $5K worth of Bitcoin but a $5K loss in stock, they could sell their stock and apply the loss to the $5K gain in Bitcoin without having to pay a significant increase in taxes after doing so (if anything). When earnings are realized within a year of the purchase date, long-term capital gains tax rates are advantageous compared to short-term ones. You can also write-off travel expenses and if you are eligible for tax credits, like child tax credits, you can also directly lower your tax amount.
Are forks and airdrops subject to taxes?
With forks and airdrops, taxation has become murky. In the past, the IRS issued new bitcoin tax guidance that was designed to address issues like whether or not you must pay taxes on cryptocurrencies but left a number of other issues unresolved. According to the new guidelines, any cryptocurrency that is formed as a result of an airdrop or a hard fork in an already-existing blockchain should be recognised as ordinary income at its fair market value. This is applicable to everybody who receives it.
Summary
Although cryptocurrencies have gained popularity, the taxation of them is complicated and ambiguous. Do you pay taxes on your cryptocurrency holdings, as a crypto investor? The IRS has updated its instructions on calculating capital gains, but investors and traders should make sure to utilize software that computes tax rates for them automatically. For this, they might make use of the FlyFin tax calculator. FlyFin helps you with your taxes and also saves you a lot of money and time.