Stay Ahead of Law Changes & Protect Yourself Against Being Audited: Corporate Transparency Act and Reasonable Compensation

Detailed Guide on Cryptocurrency Taxation and Reporting

Detailed Guide on Cryptocurrency Taxation and Reporting

 In the United States, the Internal Revenue Service (IRS) has clear guidelines on the taxation of cryptocurrency, which is considered property for tax purposes. This classification has significant implications for how cryptocurrency transactions are taxed and reported. Here’s an in-depth look at the tax implications:

Capital Gains and Losses

  • Short-Term Capital Gains: If you hold a cryptocurrency for one year or less before selling or exchanging it, any profit is considered a short-term capital gain and is taxed at ordinary income tax rates.
  • Long-Term Capital Gains: For holdings over a year, profits are subject to long-term capital gains tax rates, which are generally lower than ordinary income tax rates.
  • Capital Loss Deductions: Capital losses can offset capital gains and up to $3,000 of ordinary income per year. If losses exceed this amount, they can be carried forward to future tax years.

Ordinary Income Taxation

  • Mining and Staking: Income from mining or staking cryptocurrency is taxable as ordinary income based on the fair market value of the mined coins at the time of receipt.
  • Cryptocurrency as Payment: Receiving cryptocurrency as payment for goods or services is also taxed as ordinary income at the fair market value of the cryptocurrency when received.

Tax Consequences of Non-Compliance

Not reporting cryptocurrency transactions can lead to various negative outcomes, such as:

  • Penalties and Interest: The IRS may impose penalties and interest on any taxes due from unreported transactions.
  • Audits: An increased risk of audits can lead to scrutiny of your financial affairs.
  • Criminal Prosecution: Willful evasion of cryptocurrency tax reporting can result in criminal charges.

Reporting Requirements for All Transactions

There is a common misconception that small transactions do not need to be reported. However, the IRS requires the reporting of all cryptocurrency transactions, no matter the size. This includes transactions under $600, which must still be reported on your tax return.

Exchange Reporting and Taxpayer Obligations

While many U.S.-based cryptocurrency exchanges issue tax forms like 1099-K or 1099-B to both the taxpayer and the IRS, not all exchanges provide this information. Taxpayers must report all transactions, including those from exchanges that do not issue tax forms or are based outside of the U.S.

Comprehensive Reporting of Cryptocurrency Transactions

To ensure compliance with IRS regulations, taxpayers should take the following steps:

  • Form 8949: Use this form to report each cryptocurrency transaction, providing details on dates, amounts, and the resulting gains or losses.
  • Schedule D: Aggregate your capital gains and losses on Schedule D, which accompanies your tax return.
  • Digital Asset Question: Answer the digital asset question on tax forms such as 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, and 1120S, indicating whether you’ve engaged in any digital asset transactions during the year.
  • Record-Keeping: Keep meticulous records of all cryptocurrency transactions, including acquisition dates, transaction values, and any associated costs.
  • Income Reporting: Report cryptocurrency received as income at its fair market value on the date of receipt.
  • Foreign Account Reporting: If you hold cryptocurrency in foreign accounts, you may be subject to Foreign Account Tax Compliance Act (FATCA) or Foreign Bank and Financial Accounts (FBAR) reporting.

If that sounded like a lot, don’t worry! We are here to help. Call us at 281-440-6279 for a consultation or to receive help filing your tax return with Cryptocurrency income.

For comprehensive information on cryptocurrency taxation and reporting requirements, the IRS provides official guidance on virtual currencies, which can be accessed here.

Additional Sources:

 

The Molen & Associates Difference

Mike Forsyth

“Super helpful and timely. This is our first year with them and we look forward to trusting them with our taxes and business books for years to come.”

Caitlin Daulong

“Molen & Associates is amazing! They run an incredibly streamlined process, which makes filing taxes a breeze. So impressed with their attention to detail, organization, and swift execution every year. Cannot recommend them enough!”

Sy Sahrai

“I’ve been with Mr. Molen’s company for few years and I felt treated like family respect and dignity. They are caring, professional and honest, which hard to find these days. Love working with them.”

In-Kind Donations: Understanding Their Impact on Taxes and How to Account for Them

In-Kind Donations: Understanding Their Impact on Taxes and How to Account for Them In-kind donations are a valuable way for individuals and businesses to contribute to charitable organizations. These non-cash contributions can take many forms, from donated goods and...

Tax Loss Harvesting: A Strategic Guide to Reducing Your Tax Bill

Tax Loss Harvesting: A Strategic Guide to Reducing Your Tax Bill Investing in the stock market comes with its share of ups and downs, but even losses can offer a silver lining through a strategy known as tax loss harvesting. This technique allows investors to turn...

How to Deduct Your Travel Expenses for Business

Maximizing Your Tax Savings While Traveling Traveling for business can be a great opportunity to mix work with leisure while benefiting from significant tax deductions—if done correctly. However, many small business owners overlook travel deductions, missing out on...

Almost the Last Chance to Claim the 2021 Employee Retention Credit (ERC)!

Time is running out for eligible businesses to claim the valuable Employee Retention Credit (ERC) for 2021. If your business hasn’t taken advantage of this substantial tax credit, there’s still a window of opportunity—but it’s closing fast. The deadline to amend your...

Understanding RMDs: What They Are and Why They Matter

Understanding Required Minimum Distributions (RMDs): What They Are and Why They Matter When planning for retirement, it's essential to understand the various rules and regulations that govern how you can access and manage your retirement savings. One of the most...

What If an S Corp Owner Can’t Pay Reasonable Compensation?

What If an S Corp Owner Can’t Pay Reasonable Compensation? One of the most common questions we receive from S corporation owners is: "What happens if I can’t afford to pay myself reasonable compensation?" The answer is both simple and complex. While business owners...

S Corp Owns Rental Property: What Happens If You Die?

What if you die and your S Corp owns rental property? Owning rental property through an S Corporation (S Corp) can offer various tax advantages and liability protection during your lifetime. However, the situation becomes more complicated when the owner of an S Corp...

Understanding EIN Numbers: Common Pitfalls & Everything You Need to Know

Understanding EIN Numbers: Common Pitfalls & Everything You Need to Know - EIN Filing & Business Success Success with Business Formation & EIN Filing: When starting a business, one of the first steps is obtaining an Employer Identification Number (EIN)....

How Can I Make the Most of my Tax Meeting?

Maximize Your Tax Advisor Meeting: A Comprehensive Checklist We meet with a lot of clients and complete a lot of tax returns during tax season, so time is very precious! We want to make the most of each minute we spend with you, so we have compiled a list of a few...

How to Determine Your Tax Withholding: A Comprehensive Guide

How to Determine Your Tax Withholding: A Comprehensive Guide Understanding how to properly set your tax withholding is crucial for managing your finances and avoiding surprises at tax time. Whether you’re an employee deciding much to withhold in each paycheck or a...

Request an Appointment Today

12 + 6 =

Call us at

Pin It on Pinterest

Share This