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Things You Should Know About Cryptocurrency Taxes

Alion Mark by Alion Mark
August 21, 2022
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As a cryptocurrency investor, you need to be aware of your tax obligations. In this article, we will provide you with the most up-to-date information on how to calculate and report your cryptocurrency taxes.

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1: How Do Cryptocurrencies Work?

Cryptocurrency is a digital or virtual asset that uses cryptography to secure its transactions and to control the creation of new units. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control. Cryptocurrencies use decentralized networks to verify and track the ownership of assets. Transactions are verified by network nodes through cryptography and recorded in a public dispersed ledger called a blockchain. 

Bitcoin, the first cryptocurrency, was created in 2009 by an unknown person or group of people under the name Satoshi Nakamoto. Bitcoin is unique in that there are a finite number of them: 21 million. They can be created through mining, which involves solving complex math puzzles to unlock new bitcoins. As of February 2019, over 100 different cryptocurrencies were available for purchase with bitcoin worldwide. 

How do cryptocurrencies work? Cryptocurrencies are decentralized digital tokens that use cryptography to secure their transactions and to control the creation of new units. Transactions are verified by network nodes through cryptography and recorded in a public dispersed ledger called a blockchain. This allows for transparent peer-to-peer transactions without the need for third-party intermediaries such as banks or payment

2: How Are Cryptocurrencies Taxed?

Cryptocurrencies are treated as property for tax purposes. When you buy or sell cryptocurrencies, it’s considered a transaction that generates taxable income. The type of tax you pay depends on the country you reside in and the value of the cryptocurrency you’re trading. For example, in the United States, most cryptocurrencies are considered property and taxed accordingly at their fair market value (FMV). This means that if you trade a digital currency for another digital currency, your taxable gain is based on the difference between the FMV of the two currencies. If you trade a physical asset for a digital asset, your gain is based on its FMV at the time of sale. Taxes may also be assessed depending on how long you’ve had possession of the cryptocurrency.

3: Which Crypto Taxes Are There?

Crypto taxes are a hot topic in the world of finance. There are a variety of crypto taxes that can apply, depending on the country where you live. Here is a breakdown of some of the most common crypto taxes:

  1. Crypto Taxation in the US: The first step in any tax-related crypto adventure is to understand how US taxation works. The IRS has issued guidance on how to report cryptocurrency transactions and holdings, which can be found here: https://www.irs.gov/pub/irs-pdf/p6227.pdf . According to this document, all taxable events with cryptocurrencies must be reported on your yearly tax return (Form 1040), including any gains or losses realized from your investment(s). Note that capital gains and losses from cryptocurrencies are treated differently than traditional investments, so it’s important to consult with an accountant or tax specialist if you have questions about how to report your crypto transactions and holdings.
  2. Crypto Taxation in Europe: In many European countries, such as France and Germany, cryptocurrency taxation is still being developed by the authorities. However, it is generally assumed that cryptocurrency trading will be treated as securities trading.

4: What Crypto Transactions Are Deductible?

Cryptocurrencies are digital or virtual tokens that use cryptography to secure their transactions and to control the creation of new units. Cryptocurrencies are unique in that they are decentralized, meaning they are not subject to government or financial institution control.

Cryptocurrencies can be traded on decentralized exchanges and can also be used to purchase goods and services. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Ethereum is a more recent cryptocurrency that uses smart contracts to allow for automating complex transactions.

5: How Do I Report My Cryptocurrency Taxes?

The IRS has not yet released guidance on how taxpayers should report their cryptocurrency transactions, but there are some methods that may be useful in calculating taxes. First, let’s look at how taxable events related to cryptocurrencies are generally treated.

If you receive a payment in Bitcoin, Ethereum, or another cryptocurrency for goods or services, the transaction is considered a gain or loss based on the current market value of those currencies. If your total income from all sources is less than $600,000 ($24,600 if single), you won’t have to pay any federal income taxes on your crypto gains. However, if your total income from all sources is more than $600,000 ($24,600 if single), you’ll have to pay ordinary income taxes on your crypto gains as well as any capital gains (if any) from those transactions.

Some methods for calculating taxable gains and losses include selling off cryptocurrencies at their current market value and then using that figure to calculate the gain or loss. It’s also possible to use an exchange rate calculator to find out what your profits would have been if you had sold the cryptocurrencies at their original price. Finally, it’s important to keep track of crypto taxes.

Conclusion

This is by no means an exhaustive list of all the things that you need to know about reporting your crypto taxes. But it should be enough to get you started.

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