Cryptocurrency is a digital medium of exchange that uses encryption to verify transactions. It has gained immense popularity due to its fast and secure international payments outside centralized banking systems; as well as being used to bypass government restrictions on capital movements. Therefore, cryptocurrency has become popular with investors seeking diversification in portfolios or tax evasion in countries with oppressive regimes; however, cryptocurrency must still be reported on tax returns when sold or exchanged for other forms of asset such as stocks or bonds.
When selling or exchanging cryptocurrency in a non-retirement account, gains or losses will be treated just like any other investment and subject to short or long term capital gains rates depending on how long you held onto it before selling it. Therefore it is crucial that you track all your holdings throughout the year in order to calculate your tax liability; many exchanges offer free exports of trading data which you can use to organize records and figure out exactly how much tax is due from you.
The IRS also requires that any cryptocurrency you received as compensation for work be reported to them, including mining, staking and other on-chain activities such as mining. Your tax bill will depend on its market value at the time you received it; however investors no longer can deduct losses related to unauthorized access of private keys or security breaches from their tax burden.
Once cryptocurrency purchases and holding are no longer taxable events, however, once you sell or trade them or spend it for goods and services it becomes a taxable event. When cashing out your crypto you will need to know its cost basis so as to calculate your tax liability accurately – typically this information is provided by exchanges when selling as well as wallets containing crypto.
Reminding oneself that the IRS can impose both civil and criminal penalties for not properly reporting crypto income is also key, so it would be prudent to consult a tax professional familiar with cryptocurrency and its taxation rules for advice.
As crypto has gained in popularity, the IRS is tightening enforcement on how these virtual assets should be reported and taxed. By understanding cryptocurrency taxes and following best practices, you can reduce your tax liability while staying out of trouble with the IRS. Please be aware that any advice provided herein should not be interpreted as tax advice and readers are encouraged to speak to a qualified professional regarding their individual circumstances.