Taxation of cybercash varies based on your location. Countries like America and South Africa treat crypto transactions similarly to cash, potentially resulting in dual income sources when using virtual currencies for purchases. Depending on each country’s regulations, these income sources could be subject to varying tax rates.
The IRS wants to know about your cryptocurrency transactions this tax season. Form 1040, which U.S. taxpayers use to file an annual income tax return, has a question about “virtual currency” near the top of the first page. Investors must report taxable 2021 transactions involving bitcoin, ethereum, dogecoin and other cryptocurrencies to the federal government. For tax purposes, the IRS classifies cryptocurrency holdings as “property,” subjecting your virtual currency to the same taxation rules as other assets you own, such as stocks or gold.
And the start of the new year is a great time to get your tax ducks in a row. Here’s what you need to know about how to report virtual currency transactions on your Form 1040 for the 2021 tax season.
While it’s true you can use crypto to buy and sell products or services in the United States, don’t think for a moment that makes these transactions just like cash – at least not if your goal is to avoid trouble with IRS. Taxation of virtual currencies occurs as property, not currency. Selling them requires estimating the value lost during conversion from USD into BTC/ETH, unlike credit card payments, which don’t generate necessary tax reports, even if sourced from traditional bank transfers.
What tax do I owe on cryptocurrency if I sell it?
Capital gains and losses are important to keep track of because they may affect your taxes. Selling cryptocurrencies or similar alternative assets that had appreciated in value would result in taxation as ordinary income. However, if those investments were not profitable within one year, like with most short-term investments, you must also report any capital loss from those sales.
What if I got paid in a virtual currency for a good or service?
They report that as ordinary income to you. You should value the amount of currency in US dollars on the day you received it.
For tax purposes, record that and it will appear under ‘Ordinary Income’ if you use virtual currencies at any point during a given year, not limited to just one transaction.
What if I paid someone else in virtual currency?
The IRS views trading in cryptocurrency like bitcoin as a sale where you will realize either gain or loss. The government determines your profit/loss from these transactions based on the difference between what you paid for it and the fair current market price of the received service, as stated in their publication “IRS Tax Tips.”
Will my state tax my crypto transactions?
The best way to find out if your state has specifically addressed virtual currency is by checking with the revenue department. “Most states do not have any regulations or laws relating strictly to cryptocurrencies, which means that most of those who follow in treating proceeds from investments made through them as income would be following federal guidelines lead rather than setting up their own rules independently” according to Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting.
However, two exceptions states –Nevada and Wyoming, who dont have an income tax — did specify they would not subject virtual currency transactions to the state property tax.
(For more information on these and other questions, the IRS has created this FAQ. And if your situation is particularly complex, see a tax professional with experience in this arena.)