One of the best investments available today is cryptocurrency, and a growing number of people are beginning to do so. If you made some investments in crypto, there’s a possibility that you might also make some profits. The next question is whether you must pay federal income taxes on your cryptocurrency profit. Yes, it is required for everyone to pay taxes on any legal income they get. You must keep accurate records of your cryptocurrency gains and losses in order to pay the tax according to your federal tax rates. The taxes on cryptocurrency earnings will be covered in great detail.
Taxes on different gains
You must pay taxes on your cryptocurrency gains, although the amount depends on the kind of gains. The difference is how long you plan to keep your cryptocurrency asset, and these are the details concerning different forms of gains.
Capital gains and losses in the short term
Within 365 days of purchasing and selling an item, you will either realize a short-term capital gain if the asset sold for more than you paid for it or a short-term capital loss if it did not. Wages, salaries, commissions, and other forms of earned income are taxed at the same rate as short-term profits and losses.
The long-term gains and losses in capital
The difference between your net sales proceeds and your cost basis, if you purchase an asset and sell it after a year, is referred to as a long-term capital gain or loss. The rule of thumb is that long-term gains are often taxed at a lower rate than those on short-term gains.
How can you tell if you owe cryptocurrency taxes or not?
After evaluating if you owe crypto taxes or not, you should consider whether you pay taxes on cryptocurrency gains. You must pay cryptocurrency taxes if you spend cryptocurrency that has appreciated in value since you bought it. The numerous categories of taxable events for cryptocurrency transactions are as follows:
Trading in cryptocurrency for fiat money
Using cryptocurrencies to make purchases of products or services trading a range of cryptocurrencies.
Only if the value of your cryptocurrency has increased are these taxable. You must first ascertain your cost basis, or the total sum spent to purchase your cryptocurrency, in order to ascertain if you owe cryptocurrency taxes. The sale price or earnings from using the cryptocurrency are then compared.
How do I report cryptocurrency on taxes?
Tax reporting for cryptocurrency is not a difficult chore; all you need are a few papers and a few straightforward procedures. You only need to file out Form 8949 to report your cryptocurrency gains and losses; the documents and information you’ll need are mentioned below.
- The cryptocurrency’s name
- The time you bought it
- The day you traded it, sold it, or otherwise got rid of it
- Income or selling price
- Cost basis
- Overall profit or loss
Finally, you now know how to record your taxes and pay taxes on cryptocurrency gains. Take into account each of the previously mentioned details for more information. And if you think manual filing is too much for you to keep up with you can also automate your taxes using A.I. with FlyFin. It’s a smart tax app for independent contractors, freelancers and self-employed individuals and also keeps track of all your business expenses – like travel expenses, and the various IRS forms like the 1040-ES, 1099-K, etc.