As if taxes weren't already confusing enough, cryptocurrency trading adds a new, complex dimension. Fortunately, John F. Dennehy CPA has created a simple cryptocurrency tax guide you can actually understand.
Let's take a closer look at the crypto tax guide. And if you would like more personalized guidance and tax-saving strategy assistance, don't hesitate to reach out to the team at John F. Dennehy CPA.
Let's Get Started with the Basics...What Is Cryptocurrency?
The past few years have seen the rise of cryptocurrencies. They are basically digital currencies that can be used to buy and sell goods or services on a decentralized network. These types of cryptocurrency networks don't rely on banks or governments for their value.
Instead, they use cryptography (hence why it's called cryptocurrency) to ensure there is no double-spending of coins and to validate transactions. Some of the most popular cryptocurrencies are:
The things that differentiate these cryptocurrencies (besides the name) are mainly their prices and the way that the transactions are tracked. Networks like Bitcoin and Ethereum use a mining process to keep track of transactions.
Mining is a process in which people are rewarded for their computer's power to run the cryptographic calculations that keep the network operating.
How Is Cryptocurrency Taxed?
According to IRS Notice 2014-21, the IRS considers cryptocurrencies as property for tax purposes and not money. As such, your capital gains and losses will need to be reported via Form 8949 as well as Schedule D.
Similar to other capital gains and losses, your gains can be classified as either short-term or long-term, which impacts how it's taxed. Here are a couple of guardrails:
The way you report cryptocurrency on your income tax return will be based on how you used it and got it.
Did Your Business Receive Cryptocurrency as Payment?
A growing number of businesses are now accepting cryptocurrency as payment for services or products. And if your business does, the payment will count as taxable income just as if they wrote you a check or paid cash. In other words, you will owe taxes on the fair market value of the cryptocurrency on the day you received it.
Track Your Spending Usage with Cryptocurrency for Tax Purposes
Even though the IRS does not consider cryptocurrency to be a currency, many people treat it like it is. For example, many exchanges will let you load up a debit card with your cryptocurrency and then use it to buy goods just like you would with a regular debit card.
The important thing is that when you do this, the value of the cryptocurrency that you are using needs to be tracked for each transaction. It's the only way you'll be able to properly know the tax liability for each transaction.
However, this is where cryptocurrency can get complicated. For instance, let's say you received $200 worth of Bitcoin in exchange for building a website for a client on January 15. Five months later on June 15, the market value of your Bitcoin has jumped to $400, and you use it to purchase a hotel.
On your tax return for that year, you will need to report the $200 of Bitcoin income for the payment in January. Then you will need to report a short-term capital gain of $200, which will represent the capital gains ($200 Bitcoin in January subtracted from the $400 value when you used it).
Unfortunately, most transactions are not nice round, even numbers. If you use cryptocurrency as an alternative to cash, tracking and accounting can quickly become confusing. And to the IRS has significantly increased enforcement of cryptocurrency on tax reporting.
IRS Enforcement of Cryptocurrency Reporting
Because many people were selling, buying, and trading cryptocurrency without proper reporting, the IRS has made a change to Form 1040. The form now includes the question of whether you sold, received, exchanged, or acquired an interest in vital currency during the year.
If you affirm the question, the IRS will expect to see some notation of cryptocurrency on your return. Depending on where the cryptocurrency transactions transpired, you may be able to download a transaction report from the platform.
Contact John F. Dennehy for Cryptocurrency Tax Guidance
Taxes are hardly the first scenario investors think of when entering the world of cryptocurrency. However, as the IRS continues to crack down on compliance, it's more important than ever for you to understand how cryptocurrency is taxed and ensure you're following guidelines.
Fortunately, you don't have to do it alone. At John F. Dennehy CPA, we are a team of tax experts who will guide you through the process. Whether you use cryptocurrency personally or accept the currency at your business, we can help ensure you properly report any gains or losses on your tax return.
Ready to learn more? Contact John F. Dennehy CPA today for cryptocurrency tax guidance.