Best Tax Rules For Cryptocurrency You Should Know 2023

Budgeting / By Humbled Budget

Humbled Budget Team

With over 55 years of combine experience in the Finance/Tax Industries based in the United States, Our Team of Humbled Individuals' shares their wisdom gained through experience or technical knowledge acquired through Additional Education.

Table of Contents

Introduction

Regarding taxes, cryptocurrency is a fairly new and complicated subject. Cryptocurrency is a digital currency not backed by any government or central bank. Its value can fluctuate wildly, and the IRS has not yet fully determined how to tax it which makes tracking your taxes using this method even more difficult! Followings are some tax filing advice on cryptocurrency tips:

What are the rules surrounding taxes and cryptocurrency?

The IRS views cryptocurrencies as property rather than money. Every transaction you make with it is considered as if you were selling an asset and buying another.

You need to keep track of all your cryptocurrency transactions to ensure that none are missed in reporting future gains or losses on your tax return.

If you want to get into the details of how exactly this process works, check out our list of the top Bitcoin exchanges (and learn how they work) or read our guide on how cryptocurrencies generally work.

The method of accounting

When handling cryptocurrency, it’s important to remember that there are two different methods of accounting for your transactions: cash and accrual.

Cash basis is the most basic method of accounting, and small businesses generally use it with low turnover rates.

Under this system, you only report income when you receive it and expenses when they’re paid out. Accrual basis requires more record keeping because you must track all incoming funds before they can be spent or transferred elsewhere.

This method also requires tracking capital gains or losses from buying/selling crypto assets at different prices than what was originally paid.

When filing taxes on crypto assets as an individual (either as part of your income tax return or on Form 8949), here is how the IRS defines them:

“For federal tax purposes, virtual currency is treated as property—not currency—for reporting purposes.”

If you mine cryptocurrency, how do you report it?

You may have heard that cryptocurrency is to be taxed as property. This means that if you mine cryptocurrency, it’s taxable the same way other assets are.

You will be liable for taxes on the fair market value of the cryptocurrency you mined. The same goes for any coins you sell, though there’s one caveat.

If those sales fall under Section 1231 of the Internal Revenue Code (IRC), they’re considered capital gains and enjoy a lower tax rate than ordinary income.

However, regardless of whether they’re treated as ordinary income or capital gains, all mining activities must be reported on your taxes. Moreover, don’t forget about other expenses associated with mining, such as electricity usage.

What if I give away cryptocurrency?

If you’re giving away cryptocurrency, the value of the cryptocurrency when you give it away is considered taxable income.

If your crypto was worth $1,000 when you gave it away and it’s worth $200 now, your charitable donation was $800 ($1,000 – ($200/1.0298)).

If you have given away more than $15,000 in one year or plan on doing so in future tax years (2019), then special rules apply.

You must submit Form 8283 along with your taxes and report how much money was received from each donor and the fair market value of what was received by each donor at the time of donation.

What if I receive cryptocurrency as a payment for services rendered?

If you swap products or services for cryptocurrencies, it’s considered income. The fair market value at the time of receipt is subject to tax.

However, if you choose to hold onto cryptocurrencies after receiving them as payment, your gains will be subject to capital gains taxes (or losses).

There are many ways you can defer taxes on these types of transactions. One way is to use a like-kind exchange when exchanging one type of cryptocurrency for another (like selling ETH for BTC).

Another way is with a Section 1031 exchange which allows individuals or businesses to defer paying taxes on profits made from real estate transactions.

What are capital gains and losses?

Capital gains and losses were the difference between the value of an asset when you bought it and its value when you sold it.

For example, if you bought $100 worth of cryptocurrency in 2017 but sold it for $50 this year, your capital loss would be 50%.

If the price had gone up to $200 by year-end (a 200% increase), then your capital gain would be 100%.

Both long-term and short-term capital gains are reported on your tax return as income; long-term is generally defined as an investment held for more than one year before selling.

Long-term capital gains are taxed at a lower rate than short-term ones—15% versus 20%—but in both cases, any amount above 0 is taxable income.

Can I use losses to offset other gains?

Yes, you can use losses to offset gains. If you have enough losses in a given year and your total income is less than $500,000 per year (or $250,000 if married, filing separately), then up to $3,000 of those excess Losses may be applied to other forms of income.

However, this amount could change in the future as the tax bill keeps getting revised or modified.

However, there’s a catch if you have more than $3,000 worth of excess capital loss that needs to be carried forward for more than three years.

The IRS will let you carry out unused losses for up to five years from the date they were realized (meaning when they occurred).

Once those five years are up, it gets trickier—you can only deduct those remaining losses against any gains made during the same tax year in which those deductions were not utilized previously.

What is an income tax return, and when do I need to file one?

Income tax returns are due on April 15th unless you file for an extension. You can do that by filing Form 4868 and submitting it to the IRS before the deadline.

Don’t be too eager to take advantage of this option—you should still file even if you don’t need to because it’s a good idea to keep tabs on what the government knows about your finances!

You’ll want to file an income tax return even if you don’t think you owe any money; if nothing else, doing so will give you proof that you weren’t earning any taxable income during the year (if there was anyone who wouldn’t believe that).

Plus, if your total earnings from all sources (wages from part-time jobs included) are less than $100k in 2019 ($51k for single filers), then filing taxes might even be free.

No matter whether or not it costs money, e-filing is quick and easy: go online at irs.gov/irs-income taxes to get started.

If e-filing isn’t for you, then mailing in a paper form is another option—but make sure that everything is correct before sending away those documents.

Cryptocurrency has a lot of confusing tax regulations.

While cryptocurrencies are still a relatively young technology, there are not many rules regarding taxes. The IRS often considers cryptocurrencies property rather than currency or bank accounts.

Therefore, if you sell your cryptocurrency for $1,000 in a year and buy more with that money later that year—or if you buy $1,000 worth of Bitcoin one day and sell it the next—you’ll owe capital gains on both transactions.

The tax situation becomes even more complicated when considering how people use cryptocurrency as investments.

Do they count as income? How do they affect other financial transactions (like buying stocks)? The good news is that these questions can often be answered by consulting a professional tax expert.

However, it’s important not just financially but also morally to pay what you owe according to the laws of your country.

Conclusion

It’s important to take some time to understand your tax situation before you begin investing in cryptocurrency.

As we’ve seen, many factors will affect how much you owe and when you need to pay it. It’s also crucial to avoid falling into the hype surrounding digital currencies.

While it may be tempting to jump into trading or mining without doing research first, this could lead to headaches and penalties later on.

The best way to avoid these problems is by knowing exactly what kind of taxes apply when dealing with cryptocurrencies so that they do not catch anyone off guard.