When it comes to calculating your bitcoin taxes, the first thing you need to remember is that all cryptocurrencies are to be treated as property for the purpose of tax. Cryptocurrencies are mostly prone to 2 types of taxes, listed below.
- Long-term Capital Gains
When you have held Bitcoins for a period of more than a year, you are liable to pay tax on the capital gains.
- Short-term Capital Gains
When you have sold or traded Bitcoins within less than a year from the date of purchase, you are liable to pay tax on the capital gains.
In case your Bitcoins depreciate in value while in your possession, you will face a capital loss. Now, capital losses can be deducted from your capital gains on any of your assets, it is not limited to only cryptocurrencies.
What are the Crypto Activities that are Taxable?
According to the Internal Revenue Service (IRS), if you have engaged in the following crypto activities, you are liable to pay taxes.
- Paying for goods or services using cryptocurrency.
- Exchanging one cryptocurrency (Bitcoin) for another cryptocurrency (LiteCoin).
- Exchanging cryptocurrency for fiat currency (Bitcoin to USD).
- Receiving cryptocurrency through the process of mining.
What are the Crypto Activities that are Non-Taxable?
According to the IRS, some of the non-taxable events of cryptocurrency are listed as follows.
- Purchasing cryptocurrency with fiat currency.
- Donating cryptocurrency to a Non-Profit Organization (NGO) exempt from tax or charity.
- Gifting of cryptocurrency to a third party.
- When transferring cryptocurrency between digital wallets.
The IRS Initiatives to Reduce Bitcoin Tax Evasion
In 2014, the IRS posted an official guidance which stated that all cryptocurrency was to be classified as property rather than currency. With this information, taxpayers should treat the selling or trading of cryptocurrency as capital gains or losses. This is to be reflected on Form 8949 when submitting their tax returns.
Prior to this, the general attitude towards crypto taxes was that disclosing your crypto gains wouldn’t do much and that traders might risk an audit if they did which led to an increase in Bitcoin tax evasion.
Many crypto traders pleaded ignorance to escape the hands of the IRS as the rules on crypto taxes were still blurry and the IRS couldn’t prove the trader’s malicious intent. However, to fix this problem and reduce the number of traders from evading Bitcoin taxes, a new report was released in 2019.
This new report was issued specifically to address two key emerging compliance areas that required attention. The new 2019 Form 1040 now starts off with a question, “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
If your answer is ‘yes’, then you are liable to pay crypto taxes for the year and it will be a punishable offense if you fail to do so. With this in place, the IRS is getting more serious on the Bitcoin tax evasion frontlines. They have started closely monitoring cryptocurrency trading gains and have issued warning letters to those crypto traders who have not disclosed for the previous years.
The second initiative taken by the IRS on Bitcoin tax evasion is that they have sent out ‘educational letters’ to over 10000 taxpayers who have failed to report their cryptocurrency transactions and around 4000 official letters to taxpayers who have filed crypto taxes but have not reported accurate crypto transaction information on their previous tax reports.
Even on the official IRS website, it states, “Virtual currency, also called cryptocurrency, will remain an important focal point in 2020.”
The Bitcoin Tax Softwares to Use When Filing Crypto Taxes
As the rules on Bitcoin tax evasion tightens, the best thing to do is to report your crypto taxes accurately and on time. To help you in this process a Bitcoin tax software can be used which will precisely calculate your taxes and immensely reduce the chance of errors when filing your tax report. Some of the leading Bitcoin tax calculating software are listed below.
CryptoTrader.Tax allows crypto traders to calculate their capital gains or losses within minutes. With this software, your crypto transaction history and trades are imported onto the CryptoTrader.Tax platform from the crypto exchanges you use. Most major exchanges are supported such as Coinbase, Binance, Gemini, Poloniex, etc. When it comes to Bitcoin tax evasion, using softwares like these can aid the taxpayer and help them avoid the unnecessary scrutiny of the IRS.
ClearTax is quite a well known Bitcoin tax software. To calculate your crypto taxes, some basic details will be required such as how many crypto coins you have in your possession when you acquired those coins, the price it was acquired for, the price it was sold for and for how long it was held. In case you have not kept a record of this information, ClearTax software can integrate with all major supported exchanges and collect the crypto data required. Once done, it can calculate your crypto taxes and generate your tax reports, keeping you clear of Bitcoin tax evasion.
ZenLedger is an extremely popular Bitcoin tax software, known for its well designed and user -friendly interface. ZenLedger can import your crypto data from almost all crypto exchanges, calculate and file your reports such as capital gains and loss, closing report, donation report, profit and loss statements, etc.
To stay clear from falling into the Bitcoin tax evasion pit, using Bitcoin tax calculating softwares can make sure that the IRS perceives you as a responsible crypto trader.