The uniqueness and, more importantly, the complexity of cryptocurrencies have proven to be a hassle for most crypto traders, amateurs, and seasoned traders alike. Its foundation in Blockchain technology, coupled with vague crypto tax rules, has caused an incredible amount of confusion.
Despite this, an increasing number of people are stepping into the crypto world because they have begun to understand the importance and potential of cryptocurrencies.
They have recognized that cryptocurrencies have limitless potential and are on the verge of changing the modern economy permanently. Cryptocurrencies have certain intrinsic traits that make them a force to be reckoned with in the financial world.
Cryptocurrency transactions are irreversible. Once confirmed, a transaction cannot be undone under any circumstance.
Crypto transactions are secure. Since they run on Blockchain technology, crypto transactions do not have one point of control, making them completely secure.
Crypto traders do not need permission to use cryptocurrencies. Cryptocurrencies are entirely independent of any external influence, such as political or government manipulation.
Therefore, crypto users can start using cryptocurrencies without permission.
Taxation on cryptocurrencies
Cryptocurrencies are treated like assets such as property. This means you would have to report your capital gains and losses from your crypto transactions like you would if you owned shares. Failing to do this would render you liable to tax evasion charges.
When a taxable event occurs, a capital gain or loss is triggered that you ought to file and report on your tax return. The IRS states the scenarios that trigger a taxable event. It is vital to know what constitutes a taxable event and what does not.
What qualifies for a taxable event?
When you trade a cryptocurrency for a FIAT currency such as the US dollar.
When you trade a cryptocurrency for another cryptocurrency (ensure that you calculate the market value in USD at the time of the transaction)
When you use a cryptocurrency to purchase goods and services (you ought to estimate the fair market value in USD at the time of the transaction, as would do for crypto-to-crypto transactions)
When cryptocurrency is earned as a form of income (from mining or any other source of earned cryptocurrency)
What does not qualify for a taxable event?
Sending or receiving a cryptocurrency as a gift does not qualify for a taxable event.
If you transfer cryptocurrencies among your wallets, it is not a taxable event
Purchasing a cryptocurrency with US Dollars does not trigger a taxable event. You do not owe taxes until you trade or sell the cryptocurrency.
If you donate cryptocurrencies to a tax-exempt organization or charity, it does not trigger a taxable event.
How do you file crypto taxes?
You would need the IRS form 8949 and 1040 Schedule D to file your crypto taxes.
First, you list all your crypto transactions on the 8949 form with a few critical details such as the date of cryptocurrency purchase, date of cryptocurrency sale or trade, your fair market value, the cost basis, and your crypto gain or loss. Ensure that you include these forms in your yearly tax return.
However, this is easier said than done. The reality is that it is a difficult task for most people. Most people do not have the time or energy to file and report their crypto taxes manually. Your solution to crypto taxes is to use crypto tax software.
A few excellent crypto tax software
This crypto tax software is a popular, easy tax reporting solution. It allows its crypto users to compile their transaction history. This is done by integrating the various exchanges and placing them into one platform.
It automatically generates the crypto tax reports, just like the 8949 form. Many crypto users have understood the process of filing crypto taxes without having to spend too much time.
ZenLedger is easy to use. It is a hassle-free way to calculate your crypto taxes. It is associated with the leading exchanges and is compatible with the major crypto and fiat currencies.
It has an online platform that imports the cryptocurrency user’s transaction data and history from the exchanges into its interface in a short time and documents your tax.
The documents include various parameters like capital gains, income, donation, and closing reports.
Aside from this, it generates profit and loss statements for the user. All the documents generated through ZenLedger can be imported from its platform into your tax returns without issues.
It is well known as one of the easiest and most popular ways of calculating your crypto taxes. The platform is integrated with a staggering 25 dominant exchanges to calculate your gains and file your taxes.
BearTax contains many useful features. Firstly, the user interface is a breeze to navigate. All of your withdrawals and deposits across the exchanges can be viewed on the interface without a problem.
BearTax’s matching feature ensures that you avoid negative funds, which could lead to reduced accuracy when you file your tax report.
Libra Tax is widely known as a universal calculator. This universal calculator makes an estimate of the capital gains and losses once it analyzes the client’s crypto-related activities.
The Libra Tax software connects to the major cryptocurrency exchanges like Coinbase to keep track of the transactions.
Bitcoin Taxes is a popular crypto tax software. It is known as an optimal solution for crypto traders. It has an online platform that enables its users to import their cryptocurrency transactions and data from multiple leading crypto exchanges.
The crypto tax software mentioned above is excellent crypto tax solutions for crypto traders of all experience levels.