The Taxpayer’s Guide to Reporting Income from Cryptocurrency Transactions 

Berry Mathew

The Taxpayer's Guide to Reporting Income from Cryptocurrency Transactions 

Bitcoin was introduced to the world in a somewhat understated manner in the year 2014. Since that time, government agencies and regulatory bodies all around the world have been keeping a close eye on the growth of cryptocurrencies. The United States is hardly an exception, given that bitcoin is now undergoing gradual adoption across various regions of the world. People from every corner of the world are participating in the trading of these currencies in order to make a profit. However, the approach also requires the imposition of taxes on cryptocurrency. This article will focus on the crypto taxes that are applicable in the state of California because the tax rates and federal tax brackets varies depending on the country and government in question.

At the outset, virtual currencies were hardly more than a passing trend. If they were addressed at all, it was only in very exclusive groups within the technology and academic communities. The development of Bitcoin and the other cryptocurrencies occurred simultaneously. When several traders started seeing substantial returns in 2017, they skyrocketed to the forefront of media attention. As a direct consequence of this, the level of financial commitments has also been growing.

A primer on cryptocurrencies Cryptocurrency, often known as virtual currency, is a kind of digital or electronic money that is recorded on a public and decentralized ledger using a technology called blockchain. State tax authorities, such as the Internal Revenue Service (IRS), view virtual money not as cash or currency but rather as property. In general, state tax authorities handle cryptocurrencies in the same manner as the Internal Revenue Service does; however, the manner in which they evaluate the value of cryptocurrencies may vary from that of the IRS.

Only a few of states have included cryptocurrency in the law or advice that they have created for crypto taxes. As a form of investment, certain taxpayers may possess bitcoin. Transactions using cryptocurrencies may be subject to a variety of state tax rules.

How do cryptocurrency investment returns work? How are cryptocurrency taxes computed?

The amount of bitcoin taxes you are responsible for paying is proportional to the amount of capital gains you have made as well as the duration of time you have held onto your cryptocurrency.

According to the Internal Revenue Service, the beginning of your holding period is the day after you purchase a cryptocurrency. As a consequence of this, it is extremely important to be aware of the date on which you obtained your crypto asset as well as the applicable tax rates and regulations when selling or trading it.

The tax treatment of cryptocurrencies varies greatly from one nation to the next, and state regulations might be quite different. At this point in time, not a single nation has acknowledged any variety of “digital asset” as a form of money, cash, or legal tender. According to the various regulatory organizations, digital assets are a hazy kind of property that may be placed anywhere in the middle of the spectrum between financial instruments and commodities. Regulations are going to become more standardized as the institutional infrastructure that underpins the usage of and investment in cryptocurrencies continues to mature. Since 2017, a number of different “Bitcoin ETF” plans have been put forward, each of which provides a look into the future. The emergence of financial products that are based on cryptocurrencies will be closely monitored by regulatory agencies.

Some individuals are ignorant of the considerable Crypto Taxes implications as well as other taxes on crypto, despite the fact that more people are buying and selling virtual currencies and using them for day-to-day purchases. Depending on the type of cryptocurrency investment, investors may be required to file many reports with the Internal Revenue Service and other regulatory agencies. The Internal Revenue Service (IRS) has just lately become increasingly aware of people failing to properly submit tax returns containing virtual currencies. As a direct consequence of this, failing to appropriately declare or pay taxes on bitcoin can result in severe IRS penalty for underpayment, including even criminal tax responsibility.

The status of cryptocurrencies, sometimes known as virtual currencies, in terms of state income taxes, sales and use taxes, and the controlled unclaimed property legislation that certain jurisdictions have in place.

The term “convertible virtual currency” refers to a type of virtual money that may be exchanged for real-world currency or has an equivalent in the real world. One example of a convertible digital money is the cryptocurrency known as bitcoin.

What kinds of documents are you required to retain concerning the transactions using virtual currency?

The Internal Revenue Service requires taxpayers to preserve documents in their possession. They need to be adequate to determine the positions that were taken and reported on the necessary forms and returns. Documentation of all virtual currency receipts, sales, exchanges, and other dispositions, together with an assessment of their fair market value, should be maintained.

Cryptocurrency exchanges that enable users to export comprehensive transaction histories and trade histories at the individual deal level are the best option for taxpayers who practice fiscal responsibility. You can also use tax filing apps to track these. 

The treatment of cryptocurrency with regard to long-term capital gain taxation

If you hold cryptocurrency for more than a year before selling it or trading it, you will be required to pay the higher tax rate for long-term capital gains. This is a large amount lower than the capital gains tax levels that apply to short-term gains, which encourages investors to make investments with a longer-term horizon.

How does the taxation system work for cryptocurrency?

For the purposes of federal taxation, cryptocurrencies are regarded as property, similar to a home, rather than genuine cash, such as dollars from the United States or Canadian dollars. As a consequence of this, you are obligated to report any profits or losses in capital value that are associated with the selling or trading of bitcoin on the Schedule D of your tax return. The transaction of purchasing cryptocurrency does not constitute a taxable event; but, the transaction of selling it, trading it for another cryptocurrency, or using it to purchase something does constitute taxable income. For this, you are considered a 1099 employee. To determine how much you have gained from the sale of cryptocurrencies, take its worth on the market at the time of purchase and deduct that from either the price at which you sold it or the value of whatever you exchanged it for.

The time frame used in the calculation of taxes

How long you’ve held onto the cryptocurrency will be used to calculate the tax rate that applies to any capital gains that are generated from the cryptocurrency. If you held on to the cryptocurrency for less than a year before selling it, you will be subject to capital gains taxes at the same rate as applies to your ordinary income. Depending on your income category, you may be subject to a tax rate of up to 20% if you keep the cryptocurrency in your possession for a period of one year or more. If you were compensated for a service using bitcoin, you may be subject to a different set of restrictions. You might also be subject to self-employed tax

One last thought 

How CPAs and tax professionals may assist you in deciding the appropriate taxes to pay on cryptocurrency

You may bring yourself into conformity with the law and the procedure that abides by the law with the assistance of the qualified and experienced tax attorneys. If you employ a reputable CPA or other business of a similar nature before you receive an IRS notice of an audit, you will face minimal or no fines at all. If you are audited, the CPA should help you solve the problem.