Cryptocurrency taxation has come to the forefront of headlines due to a recent IRS announcement. The IRS is sending out 10,000 letters to taxpayers who did not report cryptocurrency income or gave incorrect reports. This leads many to question, what is involved in cryptocurrency taxation?
IRS Notice 2014-21
The IRS addressed cryptocurrency taxation in Notice 2014-21. In this notice, the IRS states that the tax rules that apply to other types of property transactions also apply to cryptocurrency transactions. This means that any gains, losses, or income from cryptocurrencies are subject to reporting and taxation, be they the kinds earned from transferring Bitcoin to paypal or otherwise. The exact nature of the reporting will depend on the type of cryptocurrency transaction. We will go over a few of the most common transactions and their taxation below.
Sold for Cash
If you sell a cryptocurrency holding for cash, the IRS considers this to be investment income. Any capital gains or losses on transactions of this type must be reported on your tax return. Whether they are long term or short-term capital gains is calculated the same way as for other investments.
If you exchange from one type of cryptocurrency to another from your oxis wallet then this is not tax-exempt. Capital gains and losses still apply in this situation. However, it is also important to note that you can not use a 1031 exchange to try to get out of taxation on cryptocurrency exchanges. Furthermore, along with making sure that all the exchanges are being recorded properly to avoid issues with taxation if you use a Bitcoin Code Test it can help to ensure that any investments or exchanges that are being done are legit.
Mining refers to the process of using computers to solve complex mathematical equations in exchange for some type of cryptocurrency. The fair market value of any cryptocurrency earned this way is part of your gross income for the year. If cryptocurrency mining is your business, you also must pay self-employment tax on any mining income. In this case, income is the fair market values of cryptocurrency on the day of earning it.
If you are looking for a tax deduction, you can donate your cryptocurrency directly to a charity. Your deduction is equivalent to the fair market value of the cryptocurrency donated. You will not be responsible for paying capital gains tax on any of the cryptocurrency included in the donation. So, donating cryptocurrency can give you a double tax reduction benefit.
Investing in Cryptocurrency
If you have an interest in investing in cryptocurrency, be sure to meet with your tax advisor so that you can fully understand how it will affect your taxes.
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