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IRS Considers Cryptocurrency as an Asset for Tax Purposes

The IRS notice states that a transaction using virtual currencies with an equivalent value in real money is subject to existing tax principles.
IRS Considers Cryptocurrency

Cryptocurrency is gaining attention at a fast pace every day. Remaining confident on the long-term prospects is okay for someone, but digital currency is subject to volatility that has left many people getting financially devoid of investment in a matter of days. Whether you're holding your crypto assets as an investment or trading them for profit, the Internal Revenue Service (IRS) wants their share of your gains. So, if you are holding cryptocurrencies, then paying taxes on crypto is a must, as outlined by IRS.

About Cryptocurrency Tax Rate

Cryptocurrency Tax Rates (Long Term Tax Rates) (2022) –

  1. For Single holders –
  2. 0% rate in the income bracket of $0-$41,675
  3. 15% rate in income bracket of $$40,676-$459,750
  4. 20% rate in income bracket greater than >$459,750
  5. For married couples filing jointly-
  6. 0% rate in the income bracket of $0-$83,350
  7. 15% rate in income bracket of $83,351-$517,200
  8. 20% rate in income bracket greater than $517,200

A For the head of the household

B 0% rate in the income bracket of $0-$55,800

C 15% rate in income bracket of $55,801-$488,500

D 20% rate in income bracket greater than $488,500

Cryptocurrency Tax Rates (Short Term Tax Rates)

  1. For Single holder –
  2. 10% rate in income bracket of $0-$10,275
  3. 12% rate in income bracket of $10,276-$41,775
  4. 22% rate in income bracket of $41,776-$89,075
  5. 24% rate in income bracket of $89,076-$170,050
  6. 32% rate in income bracket $170,051-$215,950
  7. 35% rate in income bracket $215,951-$539,900
  8. 37% rate in income bracket greater than $539,900
  9. For married couples filing jointly-
  10. 10% rate in income bracket of $0-$20,550
  11. 12% rate in income bracket of $20,551-$83,550
  12. 22% rate in income bracket of $83,551-$178,150
  13. 24% rate in income bracket of $178,151-$340,100
  14. 32% rate in income bracket $340,101-$431,900
  15. 35% rate in income bracket $431,901-$647,850
  16. 37% rate in income bracket greater than $647,850
  17. For the head of the household
  18. 10% rate in income bracket of $0-$14,650
  19. 12% rate in income bracket of $14,651-$55,900
  20. 22% rate in income bracket of $55,901-$89,050
  21. 24% rate in income bracket of $89,051-$170,050
  22. 32% rate in income bracket $170,051-$215,950
  23. 35% rate in income bracket $215,951-$539,900
  24. 37% rate in income bracket greater than $539,900

IRS Role In Cryptocurrency

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You've probably seen headlines about recent tax changes and heard about a new IRS crypto reporting form. IRS has been concerned about your paying taxes on crypto for years and has made multiple requests to have crypto transactions better tracked so they can enforce crypto tax compliance. Your sale or exchange of Cryptocurrency, at least for now, falls under the 'capital asset' umbrella by default. 

Is Payment with Virtual Currencies Coming Under Self-Employment Tax By IRS?

The IRS notice states that a transaction using virtual currencies with an equivalent value in real money is subject to existing tax principles.

The IRS notice states that a transaction using virtual currencies with an equivalent value in real money is subject to existing tax principles. Furthermore, virtual currencies with real-world equivalents or substitutes for real-world currency are generally classified as convertible currencies. Convertible virtual currencies are taxed using the same principles as real-world property transactions. Self-employment tax rules apply to business income from the exchange of virtual goods or services (such as the sale of goods or services in an online marketplace). Payments made with convertible virtual currencies received for goods or services constitute gross income for self-employment tax purposes.

How to file your taxes?

To file your cryptocurrency taxes, follow these steps:

  1.  Record all of your transactions: Most tax software is cryptocurrency-capable, but it's important to remember to keep track of all transactions in a spreadsheet to make sure that data from the blockchain matches your data. You can use Flyfin Tax calculator for paying taxes on crypto within minutes.
  2. Form 8949 helps you out as an investor to record every purchase and sale of crypto.
  3. Schedule D sheet helps in summarizing capital gains and losses from investments, including Cryptocurrency.
  4. Schedule C helps you look for mining cryptos just as a hobby or profession. If you earn more than your expenses in the year of your crypto mining business, then you have to pay self-employment taxes. 
  5. In line 8 of schedule 1, you have to report only mining cryptos as a hobby.SE taxes are not applicable for hobbyists.
  6. File your crypto taxes with Flyfin AI-powered platform. - This platform helps you out like a certified accountant, and its tax calculator helps you file your taxes in minutes.

Gain or losses from crypto trading

There are two types of gain or loss: capital gains and losses and business gains and losses. Capital gains result from investing, while business gains occur when you buy, sell, or exchange anything to run a business. When it comes to bitcoin and cryptocurrencies, this often comes down to investing—buying and holding as an investment instead of trading short-term. Tax experts say that investors generally do not have a good understanding of how taxes work with cryptocurrency purchases using U.S. dollars. U.S. tax rules are complex, but the IRS has yet to spell out the specific regulations for bitcoin. And unless you have been reporting your bitcoin transactions, the possible penalties could range from 20% to 60% of the amount owed (including interest). You must keep detailed records of all your paying taxes on crypto. Even if a transaction is reported on a 1099-K, your tax return must be noted again.

How to minimize your crypto taxes?

Various tax shelters can be used to minimize the taxes you need to pay on your cryptocurrency investments. These shelters are not cryptocurrencies but actual methods in which you can offset or lower your crypto tax liability (Tax Loss Harvesting, 401k plans, Dollar-cost average, Charitable contributions, and more). Thus, you can minimize your crypto taxes by following these steps.

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Summary - Exchanges and Risks, The IRS sees virtual currency as property. It means if you buy bitcoin, Ethereum, or another cryptocurrency such as Litecoin through a U.S. online exchange, you're subject to paying taxes on crypto on the increase in value of that asset.