Your Guide to Understanding Cryptocurrency Tax Filing

The IRS recently released a formal guide on cryptocurrency tax filing, but many people still have questions.

Understanding cryptocurrency and the tax laws surrounding it can get confusing. But the last thing you want to do is make a mistake on your tax return and incur an audit from the IRS.

Are you new to the world of day trading cryptocurrency and wondering how to report it on your taxes? If so, use our trader’s guide to understand more about filing cryptocurrency taxes. Keep reading to learn more.

Is Cryptocurrency Taxable?

In the United States, the IRS considers cryptocurrency (virtual currency) a type of property. So the same tax rules applicable to property transactions apply here.

Cryptocurrency transactions are taxable by law according to the IRS. If your cryptocurrency is a capital asset, then you have to consider capital gains and losses when filing taxes.

Capital Gains and Losses

If you sell a capital asset, a capital gains tax may apply. If you sell something for more than you bought it for, you sell for a profit. A capital gain is when you sell a property or investment and make a profit.

A capital loss is when a capital asset sells for less than the purchase price. This is usually due to a decrease in value and results in a financial loss.

You’ll owe a percentage of a capital gain to the government. The percentage you owe depends on whether it’s a short-term gain or a long-term gain.

Short-Term and Long-Term Gains

When you’ve held an investment for less than a year, the capital gain is considered a short-term gain. In this case, you’re taxed in your marginal tax bracket.

If you’ve held an investment for over a year, then your gain is considered a long-term capital gain. You would then use the long-term capital gains tax guide to determine how much you’ll owe.

You can use Publication 544 on the IRS website to learn more.

Taxable Events

A taxable event is when a specific action results in a tax reporting liability. When a taxable event happens, you have to report the resulting capital gain or loss.

For instance, the sale or exchange of convertible virtual currency can result in a tax liability. Also, the use of virtual currency to pay for goods or services in a real-world economy transaction counts as a taxable event.

Mining or earning cryptocurrency as income also count as taxable events.

Tax Software to Simplify Your Day Trading Taxes

Not sure how to report a capital gain or loss on your return? Or do you have a question on whether something counts a taxable event?

Tax software automates the process for you so you don’t have to figure it out on your own. Plus, using a refund-maximizing crypto tax software not only does all the hard work for you, but it also ensures you get any refund due to you.

Need More Help Understanding Cryptocurrency Tax Laws?

Most countries make understanding cryptocurrency and the tax laws surrounding it fairly straightforward. Use this guide to help you file your taxes and avoid any tax mistakes that could impact your refund.

But if you’re new to the world of cryptocurrency and not sure how to file your taxes, it’s best to rely on tax software.

Looking for more cryptocurrency advice? Check out the rest of our site to keep up with the latest crypto trends and news.