If you are thinking that just because cryptos are not paper money your earnings from crypto trading won’t be taxed, think again. With the meteoric rise in values of cryptos like the Bitcoin and Ethereum in the midst of the global pandemic, investors and crypto traders are wondering about taxation issues. As the Internal Revenue Service/ IRS steps up its enforcement measures, those trading and holding Bitcoins must ensure they do not violate any laws.

According to a tax attorney at Fogarty Mueller Harris in Tampa, people holding, trading, and using cryptos can become targets for audit.  Now, the FBI and IRS are tracking Bitcoin history during criminal investigations. And they have the authority to freeze these assets if required. So, you need to know what taxes you are liable to pay and which compliance laws you need to follow before you dive into the crypto waters. The IRS, for instance, considers cryptos the same way it considers assets like bonds and stocks. This is why you may find it hard to use cryptos for buying goods and services.

What You Need To Know About How Your Crypto Earnings Will Get Taxed:

  • Your 2021 tax returns will ask you to declare if you have engaged in cryptocurrency transactions. This means you must answer correctly about crypto transactions’ else, you will end up lying to Internal Revenue Service which could land you in a lot of trouble. However, the good news is that those who had bought cryptos with real money did not have to choose “yes” as their option.
  • With a brokerage/ bank you will be given a Form 1099 to report the earnings you have got for the year. This is not the same with cryptos; there is no similar method of reporting for cryptos. The IRS will not get any such reports from cryptoexchanges like the Coinbase. But, according to November 2021 legislation, tax reporting for cryptos will start next year onwards. As for now, even if there is no Form 1099 for cryptocurrencies, you must declare your profits and pay taxes as required.
  • Those using cryptos may feel that they do not need to pay taxes since they are not trading cryptos. However, the truth is every time you exchange cryptos for real money, products or services, there is a tax liability. In case the price you have got in exchange for the cryptos is more than the crypto value, you have a liability to pay taxes.
  • All profits on crypto earnings are like standard capital gains. You will pay regular tax rates on the short-term gains for assets held over a year. But for those held for a longer period, you must pay long-term capital gains taxation.
  • Crypto mining business is held differently from those trading cryptos individually. In such a situation, you can deduct expenses like any regular business. To avail of this benefit, you need to run a business; you cannot have a mining rig which you engage in as pastime.
  • If you have gifted cryptos to others, it will be considered as any other gift and subjected to gift taxes.
  • If you inherit cryptos, it will be treated just like all other inherited assets passed down over generations. These will be subject to what are called estate taxes when the estate value exceeds certain thresholds.

While central bankers, federal judges, and regulators all differ on how to categorize the Bitcoin, they all appear to agree that Bitcoins should be taxed. This explains why most countries are taxing cryptos. You should reach out to a certified accountant when you are trying to file crypto taxes the first time.