Cryptocurrencies are poised to become the standard medium of exchange for all transactions in the not so far future. These digital assets are secure and can be transferred between users almost instantly. The pace at which technology is advancing is leading us all towards an almost completely tech-enabled world that will be running at hyper speed, making cryptocurrencies perfect for fueling economies.
There are a number of technologies that come together to make a highly complex system like cryptocurrencies work, but the core technology that drives it is Blockchain, an ingenious method of record-keeping that links transactions to each other immutably. The fact that these transactions are immutably liked to one another and are almost impossible to alter makes cryptocurrencies almost incorruptible.
Since we have not yet achieved the computing power we require for the system to run 100% accurately and make transactions seamless and the infrastructure to support such a system globally has been fully developed we still need to pay taxes on certain transactions with these digital assets. So let’s take a closer look at how you pay taxes on digital assets like cryptocurrencies.
The way your cryptocurrency is taxed depends on two factors, how long was it held? And, how was it used?
Brief Overview of Taxes on Cryptocurrencies
Cryptocurrency received as payment of Goods or Services (Income)
If you have paid for goods or services with a virtual currency or are an employer that pays their employees in a virtual currency it is your responsibility to report your employees’ earnings to the Internal Revenue Service (IRS) in the W-2 Forms. To ensure you have all the data to fill out these forms you need to meticulously keep a record of the value of the virtual currency in US Dollars on the day the payments were made. If you pay wages to your employees in a virtual currency, they are subject to withholding just like US Dollars.
Cryptocurrencies held as Stock-in-Trade (Income)
If you are self-employed and frequently trading in virtual currencies any gains or losses you make need to be recorded in the US Dollar value of the gains or losses on the day you received them. These figures should be reported to the IRS in the W2 forms and will, under normal circumstances, be treated as Income for Business.
Cryptocurrencies held as Investments (Capital Assets/Property)
Since cryptocurrencies are digital assets, if you hold them for extended periods of time they will be taxed as property. The amount of tax will depend on the US Dollar value of the cryptocurrency when it was realized and the period for which it was held.
If you hold a cryptocurrency in your crypto-wallet for longer than 1 year they will be considered long-term capital gains and will be taxed at 0%, 15%, or 20% depending on your income. These rates are usually much lower than income tax rates.
Cryptocurrencies held for a period shorter than 1 year before liquidating are considered short-term capital assets. Taxes on short-term capital assets are the same as your income tax and will be subject to your Federal Tax Bracket.
Cryptocurrency Generated from Mining (Income)
You can generate virtual currencies through mining. Mining is basically a virtual payment that you receive for contributing your computing power to maintain the blockchain for the network. Any income you generated from such activities needs to be reported as Gross Income after determining the US Dollar value of the cryptocurrency on the day you received it. This requires you to keep very detailed records of your mining activities.
Crypto Tax Calculators
The fact that reporting your taxes under all these circumstances requires you to keep lengthy records of the value of the cryptocurrencies on the day you received them can make filing your taxes extremely complex. For this reason, tech companies around the world have been working hard to develop software that will record and fill out tax forms for you in a matter of minutes and we have made of list our picks for the 3 best crypto tax calculators on the web today.
Token Tax
Token Tax, a crypto-tax calculator rated by Forbes as the best platform for filing cryptocurrencies, holds that position for good reason. This easy-to-use crypto-tax software allows you to connect to all the major crypto-exchanges around the world. Once you connect your wallet to Token Tax via API it will allow you to track your profit/loss and tax liability in real-time. The software will also generate and file all the forms you require to be on top of your crypto-taxes, which include but are not limited to, Schedule C, FBAR, 8938, 8949.
CoinTracking
CoinTracking is a new-age crypto-tax software that has been steadily gaining popularity and currently has 410,000 active users. CoinTracking supports 70+ exchanges from across the globe and provides history charts and trends for 7075 cryptocurrencies. Once you add your wallets to CoinTracking it will provide you a real-time analysis of your transactions and a complete overview of your crypto-tax liability. The software also provides you interactive charts for trades you’ve made and coins you have acquired.
ZenLedger
ZenLedger is a lightweight crypto-tax calculator that has some ingenious features. This software will do everything from monitoring all your crypto-transactions to filing your tax reports to creating other important documents like Capital Gains Reports, Donation Reports, Income Reports, Closing Reports, etc. Zenledger has also partnered with TurboTax to allow you to integrate all your crypto-transaction data with your other transactions in order to make tax reporting a breeze.
So if you invest in cryptocurrencies or receive and make payments in them it will be a good idea to connect your crypto-wallet to one of these crypto-tax calculators and make sure you are on top of your taxes every time the taxman comes knocking.