Cryptocurrency is private to the point of being almost untraceable – almost.
You might think that owning cryptocurrency is a tax-free endeavor. While some could almost get away with trading cryptocurrency without declaring it on their tax return back in 2010, you’re likely to get caught if you try it today.
Is there a law that says you have to pay taxes on cryptocurrency? Yes, there is, and the only thing that’s clear about it is that you have to pay.
IRS Cryptocurrency Rules: What You Need to Know
Is there a law that says you have to pay taxes on cryptocurrency? In short, the answer is yes. The IRS knows about cryptocurrency, and it taxes virtual currencies not as earnings but as capital gains.
Essentially, if you understand how the IRS taxes property, then you know how the IRS taxes cryptocurrency.
You need to declare your cryptocurrency assets (including profits and losses) on your 1099 tax return each year.
Isn’t Cryptocurrency Untraceable?
The IRS has made it clear that it expects taxpayers to cough up capital gains tax on their cryptocurrency. But how does the IRS intend to collect? The honesty system?
Alas, if you use a major cryptocurrency exchange, then the IRS likely has your data.
Back in 2017, the IRS demanded that Coinbase (the most popular exchange) turn over data on U.S. customers who had more than $20,000 in transactions on the exchange between 2013 and 2015. Can it do that? Yes, the IRS got a court order, and it’s continuing to send messages to taxpayers who owe back taxes on past crypto holdings.
How to Calculate Taxes on Your Cryptocurrency
Reporting gains and losses on virtual currency isn’t as easy as it is on a house or a wealth account. Trading virtual currency with fiat currencies (like U.S. dollars) or with other currencies (Bitcoin to Litecoin) are both taxable events as is using cryptocurrency for goods and currencies and mining cryptocurrency.
To calculate your liability, you need to know data like your cost basis and fair market value (at the time of mining or trading as well as when selling or using it). You’ll need excellent records to make sure you generate the correct figures.
However, you’re not out of luck. You can use a cryptocurrency tax software program to simplify the process and estimate your potential tax liability. However, you will still benefit from using an accountant familiar with cryptocurrency tax law.
Is There a Law that Says You Have to Pay Taxes? Yes
Is there a law that says you have to pay taxes on your cryptocurrency? Yes, there is. It’s the same law that requires you to pay taxes on your income and all other noted assets.
Even if you think you can get away with avoiding paying tax on your cryptocurrency, you likely can’t. The IRS has data from major exchanges like Coinbase, so it knows what you traded and when.
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