Cryptocurrency is a digital representation of value. As such, you cannot hold cryptocurrency in your hand, nor can you see it or put it in your physical wallet. People have been using crypto for many years to make purchases, trade, invest, and more. In fact, cryptocurrencies are becoming more prevalent today, and one of the reasons it is so popular is the fact that it is safe, secure, and isn't controlled by any governing body.

That being said, if you're working with crypto or are planning to use it, you might be wondering about the implications that you may face when filing taxes. Well, let's talk about what you need to know when dealing with cryptocurrency and taxes:

Is Cryptocurrency Taxable?

As noted above, there are several cryptocurrencies out there, and if you're in the market for trading and selling, you have to follow tax regulations. It is clear that the IRS classified digital assets as property, so the best way to think is that you're trading property with cryptocurrency.

As a result, any cryptocurrency you've received because of business or personal interest should be accounted for in your taxes. You should be able to calculate the amount of capital gain or loss when you sell or exchange your cryptocurrency for money. If you fail to report your gains and losses accurately, you are conducting a form of tax fraud.

How Do You Report Crypto Gains?

The way in which you report cryptocurrency on your taxes depends on whether you sold the cryptocurrency or exchanged it for another cryptocurrency.

If you sold your cryptocurrencies, then you're simply selling property. In this case, you'll have to deduct any expenses you incurred during that time. For example, you can deduct the fees associated with selling and buying your crypto coins.

If you have exchanged your crypto coins for another cryptocurrency, then you'll have to report the fair market value of the coin you received when you did the exchange. On top of that, you must also provide the fair market value of the coin you traded.

What Do I Have to Report for Crypto Gains?

If you're working with fiat currency, you'll normally have to report your full gains and losses from your taxes. However, the IRS allows you to choose a specific reporting method, depending on how you want to report your gains and losses.

First, there is the specific identification method. With this method, you'll be able to report your gains and losses based on your business transactions, so your losses are offset by your profits. The second method is first-in-first-out, which means that you'll report your gains and losses based on the time of your first purchase.

With income tax, you have to report your crypto earnings based on your total income. This means that you have to add the gains from your crypto to your overall earnings. With losses, you can deduct them from your overall income.

There may be some cases where you don't have to report your crypto earnings. If you are using cryptocurrencies to execute payments on your business, then you won't have to report them. For example, you can use crypto to take payments for your services.

Conclusion

As you can see, it's pretty easy to find yourself in a crypto tax dilemma. However, if you're working with cryptocurrency, you need to take the time to be prepared, so you can report your crypto earnings properly. Of course, you should also consider consulting a tax professional to help you with your taxes. That way, you can minimize any issues when working with crypto and taxes, helping you to stay compliant!

Tottax is a tax and accounting agency that help small businesses to overcome their accounting-related problems. If you are looking for crypto tax returns help, reach out to us today!