Taxes and Cryptocurrency has been gaining popularity in recent years, and with that popularity has come increased scrutiny from tax authorities. Cryptocurrency is still largely unregulated, and as such, there is no uniform approach to taxing it. This can create confusion for taxpayers, who may not be sure how to report their cryptocurrency transactions on their taxes. Given this, we thought it would be useful to put together a brief article on this subject. If this is something that you’re interested in learning more about, read on as we break down everything you need to know about cryptocurrency and taxes.
What Is Cryptocurrency?
A cryptocurrency is a type of digital or virtual currency that is secured by cryptography. Cryptography is a process of using codes to protect information from unauthorized access. Cryptocurrencies are decentralized. This means they are not subject to government interference or manipulation.
Cryptocurrencies use various encryption algorithms and cryptographic techniques to secure their transactions. “Crypto” refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.
How Is Cryptocurrency Taxed?
While taxing cryptocurrency may seem complicated, it’s actually more simple than you think. Despite the IRS’s limited guidance around this, cryptocurrency can be taxed under two frameworks. Cryptocurrency is subject to capital gains taxes if it is bought and sold as an investment. If cryptocurrency is paid or received as income, it will be subject to regular income taxes.
If someone buys cryptocurrency and doesn’t sell it or trade it for another cryptocurrency, they don’t need to report it for taxes. Also, if they transfer their cryptocurrency from one personal digital wallet to another, that’s not a taxable event. This means that if someone moves their cryptocurrency from one personal digital wallet to another, they don’t have to pay taxes on it. However, the exchange or platform they use might give them a Form 1099-B, which they need to keep track of to prove that the currency wasn’t sold for a profit or loss.
When Is Cryptocurrency Taxable?
When you exchange one cryptocurrency for another or sell cryptocurrency for regular currency, you are making a taxable event. This means that you will need to keep records of each exchange. For every taxable event, you should have a record of the cryptocurrency’s fair market value in U.S. dollars on that day. So, if you purchased one Bitcoin when it was valued at $25,000 and sold it when it was valued at $30,000, you would have a capital gain of $5,000. Take note that you have to subtract fees associated with the transactions. Keeping records shouldn’t be that difficult as most crypto exchanges will automatically keep records of these transactions, but if you use multiple platforms or personal virtual wallets, you will need to be more careful about keeping your own records.
Conclusion
We hope this article proves to be useful when it comes to helping you figure out how taxes work when it comes to cryptocurrency. While it may seem complicated at first, the information that we’ve laid out here should help you navigate this process. Feel free to refer back to this article if you need a quick refresher on this subject.
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