The market capitalization of the digital currency has increased significantly since this time last year, increasing tremendously in recent years. Cryptocurrency has made several headlines, been the focus of social media posts, and gained a lot of notoriety in popular culture. If you have kept your cryptocurrency since then, you have learnt how to increase your net worth and have a large cash gain in your investment portfolio. The IRS classifies bitcoin as property, so if you are paying taxes on it, this transaction will be subject to tax law. But what happens if you decide to turn this former investment into real money that can be utilized to purchase products and services?
Capital Gains and Losses in the Short Term
When you want to acquire and sell cryptocurrencies within a year, you determine whether you will have made a short-term capital gain or loss depending on whether it traded for more or less than you paid for it. The tax rates determined by your income, such as salaries, wages, commissions, and other earned income, are comparable to short-term profits and losses.
Gains and Losses on Long-Term Capital Assets
You purchase and sell an asset during a calendar year, and the difference between your price and your net sales profits is determined by your long-term capital gain or loss. Because the rates are often lower for long-term gains than for short-term gains, you will pay less tax on the long-term gain. The payment is taxable income if someone pays federal income tax on cryptocurrencies in exchange for goods or services. Income tax bracket is influenced by individual income and the resulting amount depends on the rate of taxation.
If you solely use bitcoin and do not trade it, you may believe that you are not liable for taxes. You can incur a tax liability whenever you exchange virtual currency for real money, tangible items, or services. If the price of your cryptocurrency is higher than you anticipated, you will incur liability. Your cost based on the cryptocurrency is less than the value of the real currency you accept. Therefore, you have a tax burden if you take out more value from the cryptocurrency than you put in. If you don’t exchange the cryptocurrency for another asset, you may not include learned gain or loss when you buy and hold a stock.
Keep track of every transaction
You have to carefully keep track of all your cryptocurrency transactions, including the cost of acquiring the cryptocurrency. Along with this you’ll also have to declare for how long you kept a crypto coin in your possession, what was its original buying price and how much it sold for. You also need to keep all receipts associated with the transaction. If you share coins between offline cold wallets and your account, your crypto exchange might not record the cost basis or actual amount you paid for your coins, even if it may provide your crypto transactions to the IRS and you.
Time of Sale and How it Impacts Your Tax Rate
In a situation where you had a crypto asset for a long time (longer than a year), you are constantly attempting to wait for a lower tax rate. Maybe you moved to a place with cheaper taxes, got fired from your job, or retired. Afterward, you might find yourself with a lower tax rate, enabling you to sell your cryptocurrency while owing fewer taxes.
To sum up
It is simple to use bitcoins, taking into account your cost basis, good realized price, and any taxes. The IRS is taking action against tax avoidance by more carefully estimating the exchange rate of cryptocurrencies. You easily avoid tax penalties if you are diligent when preparing your tax file. But you can always use a smart tax app like FlyFin, that helps you file your tax return, find business deductions, and help you lower your tax amount.
It also reminds you of deadlines and also helps you find tax credits like earned income credit, child tax credit, education tax credit.