Cryptocurrency has been in the spotlight for some time now. Bitcoin is the first formal implementation of blockchain technology. As a result, he created waves in the financial and currency worlds by successfully maintaining a decentralized yet secure digital currency system.
In the United States, cryptocurrency is taxable as “property” by the Internal Revenue Service. The IRS had issued Notice 2014-21, which stated the same thing and a list of FAQs regarding taxable events in the United States. Even though there is still a lot of confusion regarding cryptocurrency and taxes, tax evasion is a serious crime. This can lead to warning letters and IRS audits, and you will end up paying hefty fines.
In 2019, the Internal Revenue Service (IRS) launched the Virtual Currency Compliance Campaign. The goal of this campaign was to tackle non-compliance among cryptocurrency holders to ensure taxpayers were aware that the IRS was tracking crypto events and closely monitoring every transaction in the system.
The tax collector, as part of the campaign, sent thousands of warning letters to clients in the same year, asking some taxpayers to file updated tax returns to correct a difference with the agency’s data. It was discovered that several users, mainly traders who made a fortune during the ICO craze in 2017, were unaware of their tax requirements and failed to submit taxes. Much of this was due to the ambiguity of crypto tax regulations in the United States.
Manage taxes on cryptocurrencies
One of those warning letters sent by the IRS was Letter 6173, which asked users to respond within a month, and CP 2000, which informed taxpayers that their returns did not match the records of the taxpayer. the IRS and listed the fault as well as the appropriate interest.
When a user has to file the amendment, he can dispute the total amount he owes by providing supporting documents to support his request. This can be done manually or using cryptocurrency tax software, like ZenLedger. The latter method is more convenient to save time and maintain accuracy.
But as mentioned earlier, cryptocurrencies are considered “property” in the United States. Here are three strategies for handling bitcoin taxes so you can be on the safe side of crypto laws and avoid penalties:
1. Report all crypto transactions
Digital assets are securities. And that can easily make a trader believe that the exchange is a tax-free event. The IRS, on the other hand, explicitly states that these are all taxable events that must be reported annually.
2. Use the correct tax forms
You can invest in crypto or trade crypto, mine crypto or use it as a medium of exchange – whatever you do, each of these transactions requires a separate deposit form.
- If you have transactions that can be classified as a capital gain or loss, you need Form 8949. You can complete it using the transaction reports that you may receive from stock exchanges.
- Form 1040 (Schedule D, Capital Gains and Losses) is a summary of your capital gains and losses.
- If you earned $ 600 or more in a tax year, you should record it on Form 1099-MISC (Miscellaneous Income). Your income from wagering rewards / fees, winning and other similar programs should be reported here.
Accordingly, a user should be careful to complete the corresponding IRS form in order to accurately record the transaction and estimate the required tax.
3. Keep a record of crypto transactions
Given the SEC’s definition of cryptocurrency as a digital asset, it is crucial to keep a record of your crypto transactions. Creating and keeping a record of all relevant transactions makes it easier to create its database. As a result, it is easier to calculate the profit or loss, which makes tax deductions easier. Even though traders can do this manually, it is recommended that they use a professional crypto tax tool service like ZenLedger to automate the process and keep everything organized.
The bottom line
Crypto taxes can indeed be very confusing, and new regulations make them all the more complicated. But not paying taxes can lead to huge penalties as the IRS tracks every crypto transaction.
Manual crypto tax declaration is possible, but it is time consuming and resource intensive. Active traders, investors, airdrop recipients, and DeFi enthusiasts, on the other hand, may find this confusing. As a result, using a reliable and global crypto taxation tool can save time, money, and most importantly, improve accuracy to avoid unnecessary differences.
Faq
- Is crypto taxable in the United States?
In the United States, cryptocurrency is taxable as “property” by the Internal Revenue Service. The IRS had issued Notice 2014-21, which stated the same thing and a list of FAQs regarding taxable events in the United States. Even though there is still a lot of confusion regarding cryptocurrency and taxes, tax evasion is a serious crime. This can lead to warning letters and IRS audits, and you will end up paying hefty fines.
- What is the letter 6173?
Letter 6173 claims that the IRS already has information regarding non-compliance with tax and / or reporting laws and requests a prompt response.
- What is a CP2000 IRS letter?
When your tax returns do not match the income information they have, the Internal Revenue Service (IRS) issues you the CP2000 notice. The IRS CP2000 letter is a detailed estimate of taxes and possible penalties that may be incurred due to the lack of income information.