If you’re wondering whether you have to pay taxes on crypto transactions, the answer is yes, but only if you profited from trading crypto coins for fiat money. This is because the IRS views crypto money as digital assets that you can buy and sell and not legal tender that you can use to pay for goods and services. Yet in recent developments, Coinbase, the leading digital money exchange platform has made it possible for taxpayers to file returns as well as receive IRS tax refund in cryptocurrency.
Tax filers though have to use the TurboTax, tax preparation software, as it is capable of converting tax returns into bitcoin or ethereum; or any of the more than 100 kinds of digital money available in the cryptocurrency market.
When is a Cryptocurrency Transaction Taxable?
Taxes on crypto assets are due only if there is a taxable transaction like selling. Even if your crypto holdings increase in value due to the volatile price indices of digital currencies, any theoretical gain as owner or holder is not taxable. Such gain is taxable only if realized and converted into real currency like fiat money.
If, on the other hand, loss was incurred in trading your cryptocurrencies for actual money, the IRS allows you to include it in your deductions.
Can You Avoid Reporting Your Crypto Transactions to the IRS
Even if the main advantage of dealing with cryptocurrencies is that you can remain anonymous when buying, selling or using digital money as payment, the IRS requires licensed cryptocurrency exchange entities like Coinbase to file IRS form 1099-K as part of their tax return.
Payment settlement entities like online crypto exchange sites are required to report customers who transacted more than 200 cryptocurrency deals and who have traded more than $20,000 during the taxable year.
On your part as a taxpayer involved in cryptocurrency investing, you have to report your crypto transactions by way of IRS Form 1040. Here, cryptocurrency investors provide details about any type of digital currency transaction made during the year.
How Does the IRS Tax a Cryptocurrency Income?
Taxes on cryptocurrency revenues depend, if the gain was realized from a long term or short term transaction.
A long term gain means a taxpayer owned and held the digital asset for a year or more before selling it. If so, any gain from the cryptocurrency sale is subject to capital gains tax. The applicable rate depends not only on the amount of taxable gain but also on the status of the taxpayer: single, married or head of the family.
If on the other hand a taxpayer sold the digital asset within one year or less than 365 days of owning the crypto money, the profit realized is regarded as a short term gain. The tax applicable will also depend on the status of the taxpayer. The income from selling the crypto will be subject to the applicable rate prescribed in the tax table for income taxes