If anything, making money using cryptocurrencies has been seemingly easy in the past year. However, a difficult task resulting from this is taxing these profits. Governments are eager to receive your money because a lot of profits have been made, especially towards the end of 2017. In the United States, taxing cryptocurrencies can be quite a hassle.
If there’s one thing for sure, the government is determined to collect these taxes from cryptocurrency investors. This is especially true because the US government is noticing that the amount of taxes filed do not match the profits made by US investors last December. In a recent ruling, Coinbase, which is a popular exchange, was ordered to provide the IRS information about users who made more than $20,000 in annual transactions in recent years.
To help confused cryptocurrency investors, here are some pointers you need to keep in mind. As a disclaimer, this is not legal advice. Where possible, please consult a tax professional.
- Swapping cryptocurrencies are also taxed
You shouldn’t make the mistake of thinking that taxes only apply to investments only after you sell them. In fact, you should make a mental note to keep track of all the transactions made. In fact, if you swap one digital asset to another, this will trigger capital gains even if you didn’t convert it to dollars. Therefore, you must keep in mind the price of the asset that you exchange.
For example, if you are trading Bitcoin to Ripple, the IRS won’t be lenient about this. Always keep track of all your transactions and try to print your trade history from your exchange. On top of that, these transactions should begin by December 31.
- Selling digital assets trigger taxes
The short-term tax rate for a transaction can reach 39.6%. On top of that, you will be subjected to state taxes which are 3% to 30%. As the government favors people who hold their investments for a longer period, they will tax you less if you are a long-term trader. The rules are complicated but the tax for people who hold the cryptocurrency trading for more than a year can range anywhere between 0% to 20%.
- Hard fork triggers taxes
A hard fork is something that happened to the Bitcoin community when the cryptocurrency gets split into two–Bitcoin and Bitcoin Cash. The reason for this fork was to increase the speed of transactions. Therefore, anyone who owns Bitcoin will own Bitcoin Cash as well. To the IRS, the Bitcoin Cash will still count as a taxable income. This is because the IRS has a history of treating free money as taxable income. Therefore, you have to figure the fair market value of the Bitcoin Cash.
- Remember when your taxes are due
Keep in mind that you need to have dollars on hand to pay your tax bills. Therefore, plan your finances properly. You don’t want to have all your money in the cryptocurrency account, but don’t have any money to pay your taxes in time. Even if the Bitcoin bubble pops, you will still have to pay the money to the IRS.
- If you give away your taxes to charity, there will be no taxes
Besides the exponential growth of cryptocurrencies, we have some good news. If you decide to give away your cryptocurrencies for a charitable contribution, the amount that you give away can be deducted on your taxes. Keep in mind that you have to give it directly to the charity instead of selling it first as that will trigger a gains tax.