Gaining an in-depth understanding of both state laws and Federal laws helps to reduce the risks of making costly errors when reporting taxes. More states are creating laws that affect how taxation should be paid for cryptocurrencies. While this makes it harder to keep up with tax obligations, there are several benefits to keeping in the know of both Federal and State tax laws. Some states offer more favourable tax laws on cryptocurrencies, which may help one in creating strategies to legally lower their tax obligations.
Keeping Transaction Records
Transaction records ensures accuracy in the taxation process. It is very difficult to achieve this due to the nature of cryptocurrency trading with different exchanges. It helps to set personal deadlines over time where you may export your transaction history. Carrying out screen recordings when making investments and trading may also assist in keeping track of records.
Piecing together previous cryptocurrency trades can be like finding a needle in a haystack. Tax authorities should consider that a reasonable effort has been made to record transaction.
Finding an accountant that can help you with your cryptocurrency taxes may not be that difficult. However, finding an accountant that understands cryptocurrency taxation may prove to be very challenging. Many accountants are still trying to get their head around cryptocurrency taxation laws. Nevertheless, an accountant significantly reduces the risk that you could make mistakes when filing your taxes with respect to your cryptocurrency holdings. Some accountants do a lot of the leg work, offering to assist with collection of transaction records from cryptocurrency exchanges.
The IRS’ Stance on Cryptocurrency Tax
Cryptocurrency losses help to save money in future years. This is one of the reasons why it is so important to keep records of cryptocurrency transactions. Losses carried to future years allow for savings.
Defining cryptocurrencies like the IRS does will save you plenty of headaches in the long-run. The IRS does not consider cryptocurrency to be money. Instead, it views it as an asset which means that it should treated in a similar way to stocks.
The type of cryptocurrency one purchases , undoubtedly will have an effect on the taxes they pay for their cryptocurrency investments. The IRS may view trading cryptocurrency such as bitcoin for alternative cryptocurrencies like XRP as an activity that constitutes capital gains/losses on Bitcoin based on its selling price and the purchase price.
Income made from cryptocurrency trades should be reported in Schedule D of form 1040. There are different heads which relate to different types of income from cryptocurrency. For avoidance of future complications, it is important that the right income is reported under the correct head.
Apart from keeping records of cryptocurrency transactions, records should also be maintained of hard forks that take place on the blockchain on which cryptocurrencies are based on. Hard forks are changes to the code of the blockchain ledger which result in the creation of a parallel currency. The IRS may treat income earned from such parallel currency differently in terms of the calculation of adjusted basis and fair market value.
Edel is an Editor with a decade of print and digital media experience – specializing in Science, Technology, Finance, Entertainment, and Advertising. He is also a stock and cryptocurrency investor. When Edel is not editing or analyzing charts, you can find him with his DIY lightbox taking timelapses of plants.