The Taxpayer’s Guide for Filing Crypto Taxes

In 2014, Bitcoin made a quiet entrance onto the global stage. Since then, authorities and regulators worldwide have been paying attention to cryptocurrency and its development. Since cryptocurrency is now being slowly adopted in many parts of the world, the US is no exception. People from all around the globe are trading in these currencies and making profits. However, the mechanism then also calls for taxes on crypto. The tax rates and structures vary as per different government rules across the world; this blog will be about the crypto taxes in CA.

Initially, cryptocurrencies were nothing more than a fad. If they were discussed, it was in small circles in tech and academia. Bitcoin and the other cryptocurrencies developed as a whole. They exploded into the mainstream when many traders started having significant gains in 2017. As a result, financial obligations have also been rising.

Understanding the cryptocurrencies:

Cryptocurrency, also known as virtual currency, is a type of digital or electronic money tracked on a public, decentralized ledger using blockchain technology. Virtual currency is treated as property rather than cash or currency by state tax agencies, such as the IRS. State tax agencies generally treat cryptocurrency in the same way that the IRS does, but they may use a different method to determine its value.

Only a few states have made cryptocurrency a part of their Crypto Taxes legislation or guidance. Some taxpayers hold cryptocurrency as an investment. Various state tax laws may apply to cryptocurrency transactions.

How are crypto capital gains Crypto Taxes calculated?

The amount of Crypto Taxes on crypto is determined by the capital gains you have incurred and the length of time you have held your cryptocurrency.

Short-term capital gains tax will apply if you hold cryptocurrencies for less than a year.

If you keep cryptocurrency for more than a year, you’ll be subject to long-term capital gains tax.

The IRS states that your holding period begins the day after you buy a cryptocurrency. As a result, it’s critical to understand when you received your crypto asset and what tax rates and rules apply when selling or trading it.

Crypto and the state laws:

The taxation of cryptocurrencies varies from country to country. As of now, no jurisdiction has designated any type of “digital asset” as money, currency, or legal tender. Digital assets are a nebulous type of property that exists somewhere between financial instruments and commodities, according to regulatory agencies. As the institutional architecture supporting cryptocurrency use and investment develops, regulations will become more uniform. Various “Bitcoin ETF” proposals have been submitted since 2017, providing glimpses into the future. Regulators will keep a close eye on the development of cryptocurrency-based financial instruments.

As more people buy and sell virtual currencies and use them for everyday purchases, some are unaware of the significant Crypto Taxes implications and other taxes on crypto. Crypto investments can entail detailed reporting requirements to the IRS and other related authorities. IRS has recently become more aware of failures to file proper tax returns involving virtual currencies. As a result, the failure to report or pay taxes accurately on cryptocurrency can result in harsh penalties, including criminal tax liability.

The treatment of cryptocurrency, or virtual currency, under state income tax, sales and use tax, and some states have regulated unclaimed property laws.

Virtual currency with a real-world equivalent or a substitute for real-world currency is known as convertible virtual currency. Bitcoin is an example of a convertible virtual currency.

What kind of records must you keep about virtual currency transactions?

Taxpayers must keep records by the Internal Revenue Service (IRS). They must be sufficient to establish the positions taken and reported on the required forms and returns. Virtual currency receipts, sales, exchanges, and other dispositions should be documented, and an estimate of fair market value.

Prudent taxpayers should use cryptocurrency exchanges that allow users to export complete transactions and trade histories at the individual trade level.

Treatment for the long term capital gain taxes on crypto

You will be subject to long-term capital gains tax if you hold crypto for more than a year before selling or trading it. Long-term capital gains tax rates are different from short-term capital gains tax rates, and they can range from 0% to 20% of your total income. This is significantly lower than the capital gains tax brackets for short-term gains, encouraging investors to invest for the long term.

How Do Cryptocurrency Taxes Work?

Cryptocurrencies are treated as property, like a house, rather than actual currency, like US or Canadian dollars, for federal tax purposes. As a result, you must record all capital gains and losses related to the sale or trading of cryptocurrency on Schedule D of your tax return. While buying the cryptocurrency is not a taxable event, selling it, exchanging it for another cryptocurrency, or using it to buy something is taxable. To calculate capital gains, subtract the cryptocurrency’s fair market value at the time of purchase from the selling price or the value of whatever you traded it for.

The period for calculating taxation:

The rate at which capital gains on cryptocurrency are taxed will be determined by how long you have held the cryptocurrency. If you kept the cryptocurrency for less than a year before selling it, the gain taxes on crypto would be calculated at the same rate as your regular income. If you hold the cryptocurrency for a year or longer, you could face a tax rate of up to 20%, depending on your income bracket. The losses of up to $3,000 can be written off on your taxes. Separate rules may apply if you were paid in cryptocurrency for a service.

Final thought:

How can CPAs and tax people help you in determining the proper taxes on crypto:

The skilled and experienced tax attorneys help you align you into compliance with the law and the process that abides by the law. Minimal or no penalties are imposed if you hire a reputed CPA or similar firms before an audit begins. If the audit has already started, they will represent you before the IRS and work to bring you back into compliance.

 

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