After the birth of digital currencies, a lot of people invested in the sector. Some amassed a lot of wealth while others made big losses. At the very start, governments did not know whether to tax crypto assets or not. This is because the industry was very new and unlike anything they had seen before. As mentioned in our previous article titled 'Regulations and Taxation of Cryptocurrencies Around the World,' only a few countries in the world tax cryptocurrencies.
As promised earlier on, this article will delve into the most frequently asked questions about crypto taxes.
Do I need to pay crypto taxes for coins I have not sold?
If you have bought digital currencies and decided to hold them as a future investment, you don't have to pay taxes for them. You only have to pay taxes for coins that you sell regardless of how small or big the number is. Selling even one coin is a taxable event and you need to report it.
How does the government tax Bitcoins?
In the US, the IRS treats crypto assets as property. Consequently, when a crypto holder sells their assets, the IRS taxes the sold coins based on the difference between the cost of the cryptocurrencies and the profits or losses obtained.
What if I registered losses while trading cryptocurrencies?
If you made losses after selling cryptocurrencies, like most adopters did last year, you can avoid losing more money by filing these losses. Reporting these losses offsets other sales from which you made capital gains. More information about this can be found on this page.
The main difference between the two is the amount of time between the time of purchase crypto assets and the time of selling them. The IRS considers coins that have been held for a year or more as capital gains. Long-term capital gains have lower tax rates compared to short-term capital gains.
Are proceeds from crypto mining taxable?
The IRS taxes income obtained by mining cryptocurrencies. The agency calculates the taxes you owe by multiplying the number of coins you mined by their USD value at the time of mining.
How do I calculate gains or losses?
The IRS uses an accounting method known as first-in-first-out when calculating crypto taxes. This method assumes that the first coins bought are the first coins sold. You can calculate your taxes by finding the price difference between the first batch of coins you bought and the first batch of coins you sold.
What do I do if I haven't been keeping records when trading cryptocurrencies?
Start by checking whether the crypto exchanges you traded on can let you download your trading history. If you do not have the exact records, do not be stressed as the IRS is used to such mistakes. However, the agency needs you to try and be as precise as you can when trying to file your return. The IRS prefers that you estimate the prices instead of failing to file your returns altogether.
Do you have any other questions regarding crypto taxes? Share them with us in the comments section below.