Disclaimer: This is not legal or financial advice. You should contact an attorney, accountant or tax professional to assist you with any legal claims or taxing filing issues. This is not financial advice and we cannot be held personally responsible for financially decisions by the reader.
It is rumored that the IRS has recently sent out over 10,000 letters to crypto traders reminding them of the capitals gains taxes that need to be paid on trading crypto. This may come as a shock to some of you. How come decentralized tokens are taxed?
Well, for starters, as of 2014, the IRS has considered an asset to be taxed as a capital gains tax. The IRS recently became aware of users who may have or had cryptocurrency assets that they did not report in their taxes because the popular US exchange complied with IRS in handing over user information. Did you get one of these letters from the IRS? You’ve come to the right place. If you didn’t, but never want to get one, maybe keep on reading.
There were 2 main types of letters sent from the IRS to crypto investors. You may have either received a 6173 of 6174 Letter from the IRS. If you received the 6173 letter, it will most likely require you to take action, meaning amending your tax filing or filing additional documents, which we will cover in just a second. On the other hand, if you received the 6174 letter, you most likely will not have to do anything right away. However, this letter serves as ‘warning’ of sorts, meaning you ought to either carefully comb through your tax fillings and crypto profits, or consider hiring a professional to review these for you to ensure you are in full compliance with tax laws.
Including your cryptocurrency earnings in your taxes isn’t hard. Because crypto coins are assets, they are taxed as a capital gain. There are two types of capital gains taxes, long term and short term. Short term capital gains taxes with regards to crypto are profits that you have made from holding and selling cryptocurrency within a single fiscal year. Note that assets are only taxed when realized, meaning when they are sold. Any day traders of crypto will have a lot of short term capital gains taxes to report. These taxes are simply taxed at the same rate as your income, unless they push your over your marginal tax bracket.
On the other hand, long term capital gains taxes are for assets that you have held for more that one year. Long term capital gains taxes have their own marginal brackets of 0, 15, and 20% depending on your income or that of the household.
Below we will be covering some of the tax forms that crypto traders may need to fill out. There may be additional forms mentioned, and these forms do not apply to traders universally. Be sure to take advice from a tax professional before filing any documents with the IRS.
Form 8949- the sales and other dispositions of assets form is for you to list every single trade, buy and sell that you have made with crypto. Do not include profits made from mining, as those are to filled as a form of self-employment.
Schedule D- the Capital gains and losses form is for your total asset gains including crypto.
Form 1040- The traditional income tax form for the individual. Similar to 1040EZ. Crypto gains should be listed under the ‘other income’ section.
Schedule C- Profit or Loss from Business form is for any mining related earning or other forms of self-employment.
Form 4684- the Casualty and Theft form can be filled out if crypto was stolen from your account or has gone unaccounted for.
We hope this posts helps your tax filing a little bit easier and answer some of your questions regarding the taxes that needed to paid on crypto assets.