In the first part of this series, we explored different kinds of cryptocurrency transactions considered taxable by the IRS. While most transactions or exchanges involving cryptocurrency will be taxed, there are a few unique situations that are considered untaxable. However, even in these situations, you probably still need to report them to the IRS when you file your taxes. Connect with an accountant to ensure everything is in order.
Situations When Crypto Isn’t Taxed
Not everyone who owns cryptocurrencies will have to pay taxes this year. There are times when you can avoid paying taxes on cryptocurrencies.
Buying and Holding
Although it’s possible to buy and hold cryptocurrencies, it’s not considered a taxable asset until it’s sold. Transferring ownership of your assets from one wallet to another does not count as a sale, and it’s not considered a transfer of capital.
Crypto Donations
The IRS also states that donating cryptocurrencies to charity will not affect your tax liability. This means that donating them to a charity will not result in a loss or gain on your return.
If you donate a cryptocurrency to charity, you’ll be able to deduct its fair market value, which is equal to the amount of money that you would have paid in taxes if you held it for more than a year. However, if you held it for less than a year, your deduction would be less.
Crypto and Capital Gains
If you sell a cryptocurrency, you’ll have to recognize capital gains or losses on the sale. This means that if the price of the asset exceeds the amount that you bought it for, you’ll have to pay taxes. Generally, long-term capital gains taxes are due if you held the asset for more than a year.
If you held a cryptocurrency for less than a year before selling, you’re not required to pay taxes on the short-term capital gains. On the other hand, if you held the asset for over a year, then you’ll be required to pay long-term capital gains taxes.
Tips for Keeping Records
When you trade stocks and bonds, the securities firms that you deal with are required to provide you with a tax form that includes all of the details related to the transaction. However, this is not always the case with cryptocurrency exchanges.
This requirement means that you’ll have to keep track of all of the details of the transaction in order to report all of the necessary information on your tax return.
Having the necessary records to keep track of all of the transactions related to cryptocurrency can help you file a more accurate tax return. You should also include all of the relevant information about the transaction, such as the date of the purchase and the amount of money that was transferred.
If you’re a tax preparer using software like TurboTax, then importing cryptocurrency transactions into your account can be a little easier. Through a partnership with several cryptocurrency exchanges, such as Coinbase and Robinhood, you can now import thousands of transactions at once.