Filing taxes is a crucial activity that is done annually. Although the process can be tedious, Its importance cannot be underestimated. With the rising popularity of cryptocurrency, governments are now imposing taxation on crypto-related transactions. The taxation of investments done using cryptocurrencies is quite favorable for long-term investors. The fact that crypto is taxed like property is one difference among many in which regular taxes differ from crypto taxes.
Reporting the taxes
For regular taxes, the income you earn is taxed in the following ways: advance tax payments, fees deducted from the source. Self-assessment taxes that are paid before filing the income tax return (ITR) are also included. For income tax, you will need to fill a 1040/1040SR and schedule C, for self-employment require schedule SE form while the estimated tax is filled using 1040-ES forms.
If you are an employer, you are required to fill in W-2 for employees and W-2 and W-3 to the administration of social security. These forms provide information on Medicare and social security taxes and income tax withholdings. Corporate taxes are filled using form 1120. When reporting crypto taxes, you will require forms 8949 and 1040 schedule D. The interesting part comes in when you, as the company owner, had transacted with non-employees of your organization. In such a case, you will be required to create a 1099 form, to indicate and report all the miscellaneous payments that were made in those transactions. This will assist the IRS in determining the taxable amount from those activities.
Please fill in the details of every crypto trade, including the dates in which they were acquired, sold, the proceeds you received, and the cost and indicate the total gains in schedule D. This includes profits from trading artwork, stocks, cars, collectibles, and bonds. To effectively fill form 8949, you will need to have the details you used to calculate the actual benefits.
The Taxable Events
Taxable events refer to a transaction that will lead to a tax consequence. Governments set the rules and regulations for events that translate to taxable events for businesses and individuals. For regular taxes, most taxable events occur as a result of paying and receiving wages or salaries, something that falls under income tax.
Taxable events in regular taxes include receipt of stock dividends, selling assets, buying and selling goods, and making withdrawals from a retirement savings plan. You will also receive a tax liability from wages and salaries, changing a traditional IRA to a Roth IRA, income derived from forgiveness of a loan, and redeeming a US savings bond. For crypto, taxable events occur as a result of crypto to crypto trades, using cryptocurrency to buy and sell goods and services and also crypto to paper currency trades. Transfer of crypto from one wallet to another does not qualify for a taxable event; buying crypto using USD and so is gifting a cryptocurrency to someone else. However, this event will trigger a gift tax if you exceed the exempted amount.
Capital Gains Tax
Capital gains tax is imposed on an asset you bought and sold after a specified period. This tax is triggered when you sell this asset, but the stock shares that were accrued before the asset was sold will not be included. When you sell the asset for a price lower than its buying price, the capital gain may be lowered.
This tax exists in two categories, short and long term, and they have different rates. In the United States, assets held for more than a year have capital gains tax rates 0% for people who fall under the 10%-15% tax bracket. A 15% tax rate is imposed on the people who are under 25%-35% bracket and 20% for those categorized under the 39.6%.
It is easier to determine and value assets that belong under regular taxes rather than cryptocurrencies. Determining the fair value of the cryptocurrency at the time of purchase and sale of the asset is tricky. This is because the cost of cryptocurrencies changes regularly. It is advised that if you used the highest price of that trading day when purchasing, the same should also apply when selling.
Having all the necessary documents and receipts makes the process of filing taxes quite straightforward. Keeping all your records saves you time and resources.