Cryptocurrencies have emerged as formidable tools in the landscape of modern financial systems. You can find more than 10,000 different types of cryptocurrencies today. Therefore, it is important to understand whether they can be included in the modern tax systems. You might have doubts regarding the best practices to track crypto transactions for taxes and reporting your crypto income. However, the perspectives on cryptocurrencies differ across governments, financial institutions, and users.
For example, the Central African Republic and El Salvador have already adopted Bitcoin as legal tender. On the contrary, critics point out that cryptocurrencies are useful only for scams, gambling, and crimes while emphasizing their volatility. Irrespective of the success or failure of cryptocurrencies, it is important to find a coherent approach to crypto taxation. Let us learn more about taxation for cryptocurrencies in the US and how you can track and report crypto transactions.
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Are Cryptocurrencies Currency or Digital Assets?
At first glance, anyone would assume that cryptocurrencies are just digital assets. On the other hand, it is also important to note that tracking cryptocurrency transactions would also involve classifying them as currency. Upon selling cryptocurrencies for profit, the capital gains would be subject to taxation like other assets. On top of it, buying products or services with cryptocurrencies would also invite taxes according to the value-added or sales taxes applicable for cash transactions.
Before you look for a Bitcoin transaction tracker, you must also learn about the most formidable difficulty in taxing crypto assets. Cryptocurrencies are anonymous, and it is difficult to link crypto transactions with specific firms or individuals. Reporting rules on centralized exchanges can lead users towards decentralized exchanges or peer-to-peer transactions without the involvement of any centralized authority.
With such challenges, it is difficult to integrate crypto comprehensively into the larger tax system. Therefore, policymakers must come up with effective, clear, and coherent frameworks to avoid confusion regarding taxation of cryptocurrencies.
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What are the approaches to taxing cryptocurrency in the US?
Cryptocurrencies are gradually gaining more popularity for mainstream adoption. Therefore, the United States Internal Revenue Service, or IRS, has been focusing more on taxation of cryptocurrencies. Interestingly, cryptocurrency is considered currency rather than property or merely a digital asset for implementing crypto tax.
You would need a crypto wallet transactions tracker to ensure accurate tracking and reporting of crypto transactions to avoid penalties. If you choose investments in crypto assets, such as non-fungible tokens, and use them for other profitable transactions, then you must prepare for crypto taxes.
It is important to remember that purchasing cryptocurrencies or the rise or fall in their value does not invite taxes. You would have to pay taxes when you invest, sell, or give away the cryptocurrencies for profits. The two common taxes for cryptocurrencies include capital gains tax and the income tax.
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Capital Gains Tax
Capital gains tax is applicable to profits achieved through the sale of assets purchased at lower prices. As you search for answers to “How to track crypto transactions?” you must know that capital gains tax comes into play when you raise profits from selling or trading digital assets. If you had the cryptocurrencies or assets for less than a year, then their sales or trades would be considered short-term gains. On the other hand, holding the assets for more than a year entitles them to long-term gain.
Some of the important situations in which you have to pay capital gains tax include selling cryptocurrencies for fiat currency and sending cryptocurrencies with a value of more than $15,000 as gifts. You would understand the need to track crypto transactions for taxes by learning that buying any product or service with cryptocurrencies is also eligible for capital gains taxes.
Swapping or trading one cryptocurrency for another asset also invites capital gains taxes. For example, you would incur capital gains taxes for buying NFTs with cryptocurrencies. Therefore, it is important to ensure the accurate tracking of all crypto transactions, as declarations of capital losses can alleviate capital gains tax.
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Income Taxes
Income tax is also an important aspect of cryptocurrency transactions. It is applicable to the financial rewards from staking and mining tokens. With the right Bitcoin transaction tracker, you can keep an eye on all the transactions that qualify for income taxes.
First of all, you would have to pay income tax to receive cryptocurrency through airdrops. It is also important to note that income tax is applicable to cryptocurrencies when you earn interest from DeFi lending protocols. If you receive cryptocurrencies as payment for your work, then the transaction would be eligible for income tax.
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Long-Term Cryptocurrency Taxation
Another crucial aspect that you must keep in mind before tracking cryptocurrency transactions is the duration of ownership. IRS implements long-term crypto tax rates for gains on cryptocurrencies that you have owned for more than a year. If you file taxes as a single individual, then you don’t have to pay any tax on gains measuring up to $44,625. On the other hand, married people or heads of household would have to pay taxes ranging from 0% to 20%, depending on the income tax brackets.
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Short-term Cryptocurrency Taxation
Tracking your crypto transactions also requires emphasis on learning about short-term gains. When you achieve profits on trading or selling cryptocurrencies that you held for less than a year, you will have to pay according to short-term crypto tax rates. The short-term crypto tax rates vary from 10% to 37% according to income brackets for heads of household, single filers, and married coups who choose joint filing.
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Which Cryptocurrency Transactions are Tax-Free?
The confusion about finding the answers to “How to track crypto transactions?” for taxation in the US would draw attention towards transactions that are not eligible for income tax or capital gains tax. Here is a list of crypto transactions that are not taxable in the US.
- Holding ownership of cryptocurrencies without sales.
- Developing new NFTs.
- Transferring cryptocurrencies between your own wallets.
- Giving cryptocurrency that amounts to less than $15,000 as gifts.
- Donation of cryptocurrencies to charities.
- Using fiat currencies to buy cryptocurrencies.
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Which Platforms Can Help You in Tracking Crypto Transactions?
You must ensure accurate tracking and reporting of all cryptocurrency transactions alongside consulting with a tax professional to address all tax obligations. Rather than using a crypto wallet transactions tracker, some users can opt for screenshots of the transactions they make in a year. However, some people may experience trouble in recording crypto transactions across all platforms. Therefore, you should choose special crypto tax software that can help you track crypto transactions and generate accurate reports.
Some of the most popular options among such software include Accointing, Koinly, and CoinLedger. The uses of these tools are not similar to those of a Bitcoin transaction tracker, and they serve distinct purposes. Interestingly, all of these tools help in tracking crypto transactions. You can also go for a DIY approach with the following step-by-step guide to track and report crypto transactions.
- Begin with identification and classification of all crypto transactions, including sales, trades, and purchases. You must prepare a list of the type of cryptocurrency, date of transaction, amount, and value at the time of transactions. It is also important to note the important wallet addresses.
- Determine the cost basis for every transaction, including the fees, purchase price, and other associated costs.
- Find the profit or loss on the transactions by calculating the difference between fair market value and the cost basis of the cryptocurrency.
- Differentiate the short-term from the long-term transactions depending on the duration of ownership of the cryptocurrencies.
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How Can You Report Cryptocurrencies in Your Taxes?
The steps to track crypto transactions for taxes should be followed by the best practices to report cryptocurrencies in your taxes. You can use the crypto tax form 8949 to report the sales and disposal of capital assets, such as cryptocurrencies. The form includes two parts, distinctively for short-term and long-term disposals. You would also have to select option C on form 8949 to report short-term transactions.
In the next step, you can report your crypto income on Form 1040. You can use Schedule C of Form 1040 to report crypto earnings as a business through payments for labor, staking income, or mining income. Keep in mind that you can also report crypto income from forks, airdrops, or other sources in Schedule 1 of Form 1040.
Final Words
The challenges for implementation of taxation on cryptocurrencies revolve primarily around the pseudonymous nature of crypto assets. It is important to learn the best practices for tracking cryptocurrency transactions alongside the functionalities of tools for tracking crypto transactions and taxes.
The complexity of cryptocurrencies and the continuous innovation have created troubles for regulators and policymakers in the domain of cryptocurrencies. However, you should understand that cryptocurrencies are also subject to taxes such as capital gains taxes and income tax. Learn more about the best tools to track your crypto transactions and make the most of crypto taxes now.
*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!
