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Anyone who wants to buy Bitcoin should know that the coins will be taxable. There are no exceptions to this rule and the IRS will pursue insolvent taxpayers.
However, the IRS is one of the hardest federal bureaucracies to deal with. When it comes to cryptocurrency, it’s hard to know when taxes are due and how to pay them. This guide contains essential information to help cryptocurrency owners, or potential owners, who don’t know how to get tax return season on the right track.
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How do cryptocurrency taxes work?
The tax authority considers cryptocurrencies such as Bitcoin or Ether as digital assets that represent value and act as a medium of exchange. When it comes to charging taxes, it is treated as property. Charges on any cryptocurrency you own are based on the amount of gross income you get from cryptocurrencies.
In order for cryptocurrencies to be taxable, the owner must have domain and control over them. If a trader receives a coin and can trade, he has dominion and control. If the owner has a cryptocurrency in a wallet, but is unable to trade, sell, buy or trade it, they have no control or dominion over the coins. In this case, the cryptocurrency cannot be taxed.
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Here is a real life example. (1) Brian received a cryptocurrency unit worth $ 40 on June 1, 2020. The transaction is recorded in the distributed ledger and Brian is able to buy, sell and trade the cryptocurrency. This means Brian received $ 40 in gross income. This amount is taxable. However, if Brian receives the same amount of cryptocurrency, but for whatever reason, he cannot use it, that cryptocurrency is not taxable because he does not control it.
There are instances when cryptocurrency is not taxed. The transfer of cryptocurrency from one exchange to another is not taxable. Purchases are also not taxable. Cryptocurrency gifts are not treated as income; however, if they subsequently produce income, that income is taxable. Additionally, if cryptocurrency is received as part of an inheritance to satisfy an heir’s right to income from a property, it is treated as income from the property and is taxable.
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Are cryptocurrency losses tax deductible?
As with stock trading, losses incurred from cryptocurrency trading must be reported to the tax authority. It can then provide relief on the basis of those losses in the form of a tax refund. Taxpayers can deduct $ 3,000 per year or $ 1,500 for those who are married and filing separately. For example, someone who loses $ 6,000 in 2020 can make two $ 3,000 deductions for two consecutive years to cover the losses.
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How to submit cryptocurrency taxes
All proceeds from the cryptocurrency must be reported. In 2019, the IRS included a question on Form 1040 asking taxpayers about income from cryptocurrency. Taxpayers who have profited from cryptocurrency should answer “yes”. Cryptocurrency owners must also submit a report on IRS 8949 capital gains and losses.
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The best way to present taxes accurately is to hire a professional to do it. Several companies specialize in tax preparation and filing, such as H&R Block. There is also TaxBit, which is uniquely designed tax preparation software for taxpayers who own cryptocurrency. Cryptocurrency owners can also hire a private accountant to assist with tax filing and filing.
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Will the IRS call me if there is a discrepancy in my taxes?
The IRS will contact anyone they believe owes them money. Typically, the IRS will contact cryptocurrency owners if they have failed to submit IRS Form 8949 for reporting gains or losses. The IRS has created a team to search the blockchain for delinquent taxpayers. Anyone who has not reported their gains or losses will be audited. Audited taxpayers should seek the assistance of a tax attorney. A lawyer can work on behalf of the taxpayer to resolve the dispute and possibly reduce the amount owed.
The IRS will send a notice to anyone who plans to check. This notice will contain the taxpayer’s identification number, a sender’s address, a telephone number and information on why the taxpayer was contacted. Anyone who receives such a letter should contact the IRS to find out if it is a legitimate verification or an attempt to collect taxes. Such notices may be an attempt at fraud. If you suspect fraud, notify the IRS and don’t speak to them or the police, especially the FBI, without a lawyer present.
Concluding remarks on the IRS and cryptocurrency
Cryptocurrency traders need to do everything they can to stay IRS compliant. The main things to do to stay away from their radars are to submit Form 1040 for each tax season and Form 8949 for reporting gains and losses.
