With cryptocurrencies gaining popularity by the day, people are becoming increasingly involved in the crypto-world and everything it entails. Given how cryptocurrencies are entirely different from any currency or asset the market has ever seen, it is not surprising that there is a lot of confusion around the subject.
Any cryptocurrency-related apprehension primarily stems from the thought of filing and reporting crypto taxes. The unique nature of cryptocurrencies, coupled with the amorphous crypto tax rules set by the Government, has left many utterly perplexed.
What is Cryptocurrency?
In a nutshell, a cryptocurrency is a digital medium of exchange that employs strong cryptographic functions to verify and secure financial transactions. Cryptocurrencies were developed using Blockchain technology, which can be considered a distributed or public ledger.
The absence of a central regulatory body is its most noteworthy characteristic, which is not the case with traditional FIAT currencies. A central server is put in place to prevent double-spending between the two entities in a payment system in the case of FIAT currencies.
However, there exists no such server in a decentralized Blockchain system. The entire system is regulated by the members of the network. Therefore, every component in this network must have the entire list of the transactions that occur. This is crucial to make sure that future transactions are valid.
Characteristics of Cryptocurrency
As mentioned earlier, cryptocurrencies are different from anything we have ever seen. What makes them different? Before we talk about crypto taxes and cryptocurrency tax software, it is vital to have a general idea of what cryptocurrencies are about. Let us find out.
Once you perform a cryptocurrency transaction, there is no way to undo it, regardless of your actions. Approaching your bank or any other central authority will prove to be futile because they have no control over cryptocurrencies.
The cryptocurrencies that you send and receive are on digital addresses that contain chains made up of multiple characters. While you may able to analyze the transaction flow, there is no way for you to trace the real-world identities of the crypto accounts with whom you carry out transactions.
Since crypto transactions are recorded on a distributed ledger, there is no single point of vulnerability or failure. Every component in the network has a copy of the ledger, which means that every transaction can be verified with this ledger. This renders transactions less prone to hacking, bugs, and system failure, which is not the case with a centralized system.
As cryptocurrencies are usually limited in their production they are not susceptible to economic anomalies like inflation.
Cryptocurrencies are taxed the same way property is under federal tax law in the United States. This means cryptocurrency transactions are subject to capital gains, just like property. Capital gains must be reported on the 8949 form.
When do you have to pay crypto taxes?
When you sell cryptocurrencies for FIAT currencies
When you trade cryptocurrencies for other cryptocurrencies
When you make use of cryptocurrencies to pay for goods and services
When do you not have to pay crypto taxes?
If you choose to donate your cryptocurrency to tax-exempt charities or organizations
If you transfer your cryptocurrency between the wallets you own
When you purchase a cryptocurrency using a FIAT currency
If you gift small amounts of the cryptocurrency which do not exceed $15k
If you choose to lend your cryptocurrency
Capital gains on your cryptocurrency are generally easy to navigate. If the cryptocurrency you have purchased goes up in value, the profits generated on it are considered capital gains.
Should your cryptocurrency decrease in value, the losses incurred on the sale of cryptocurrency may be set off against the other capital gains you have to minimize tax.
A vital point to keep in mind is that you may deduct capital losses against ANY of your capital gains. This implies that capital losses may be deducted from capital gains made on your other assets.
All your capital gains must be declared on the 8949 form. You will need to maintain an accurate record of every cryptocurrency transaction you perform to calculate your capital gains and to avoid overpaying crypto taxes.
The process of paying crypto taxes is generally what keeps people away from the crypto world. You can vastly simplify the process of filing crypto taxes by using cryptocurrency tax software.
Cryptocurrency Tax Calculators that you can look into
Here are a few cryptocurrency tax software that you can employ to reduce the burden of filing your crypto taxes.
Bitcoin.Tax is a popular cryptocurrency tax software that old school crypto traders and investors often turn to, to take care of their crypto taxes. However, its primary limitation is that it looks slightly dated when compared to other crypto tax calculators. Bitcoin.Tax is still in the race if you have an affinity to the traditional crypto tax calculators.
Launched in 2017, Zen Ledger is a straightforward and easy-to-use online cryptocurrency tax software that has everything you need to file your crypto taxes in the US.
While it does not boast the extra bells and whistles like some of its competitors, its user-friendly interface makes it a cryptocurrency tax software worth checking out.
Some of its features are Audit report, CPA access, FIFO/LIFO designation, unlimited exchanges, crypto as income, ICOs & airdrops, Tax-loss harvesting, FinCEN/FBAR alert, and Turbo Tax integration.
CoinTracker is one of the best-known crypto calculators on the market. It supports just about every crypto exchange there is. This cryptocurrency tax software allows you to generate instant tax reports seamlessly and efficiently track your crypto portfolio.