Guide to paying taxes on cryptocurrency income

Many people misunderstand cryptocurrencies, believing that their anonymity hides them from the Internal Revenue Service. In fact, income from cryptocurrencies is taxable. Here’s a guide on how to pay in 2024.

Many people still have misconceptions about how cryptocurrencies work. They have heard that cryptocurrencies provide anonymity, which leads them to develop the false assumption that even the IRS will not be able to track how much income they receive from cryptocurrencies.

But that’s not true. Not only do you have to pay taxes on your crypto income, you also have to follow a strict procedure. Here’s how to pay taxes on your crypto income in 2024.

Understanding Taxable Events

The first thing you need to understand is the taxable events involved. There are many different ways to earn income from cryptocurrencies, and identifying some of these events will help you determine the correct procedures for making these payments.

Cryptocurrency trading

Selling one cryptocurrency and buying another is taxable. This is important because new promising cryptocurrencies are being introduced every day, and tracking them down is often far from easy. According to cryptocurrency expert Michael Grau, most people are interested in the potential for high returns, while others are motivated by the promise of early investments.

Most importantly, every time someone makes a trade, they are required to report the fair market value of the cryptocurrency they received. This is a huge obligation that many crypto traders ignore.

Purchase of goods and services

Cryptocurrencies can be used to purchase goods or pay for services. In most countries and jurisdictions, this is subject to tax; however, determining this tax is much more difficult when it comes to cryptocurrencies.

The bottom line is that the customer has the exact time of the transaction, and during the reporting process, they are required to report the fair market value of the cryptocurrency that was used in the transaction. To some, this may seem as simple as simply stating the price in fiat currency, but it often ends up being a bit more complicated.

Sell ​​cryptocurrencies

Every time cryptocurrency is sold for fiat currency (such as USD or EUR), it is considered a taxable event. In this event, both capital gains and capital losses must be reported. Now, this is basically just a more standard form of the taxable event we described when we talked about cryptocurrency trading.

The bottom line is that this is always the ultimate goal when trading cryptocurrencies. Crypto adoption is still not so great that anyone will be able to use it for all of your purchases. In other words, in the end, trading it for fiat currencies is what people are looking for. Keep this in mind before you do this.

Cryptocurrency mining

Cryptocurrency mining is very expensive. Someone has to buy the necessary equipment, invest in the appropriate software licenses, set everything up, and pay a huge electricity bill. In the current climate, it is not known what the returns will be.

Now, the last thing anyone wants is to calculate all these expenses and see if they’ll be able to break even (or even make a profit)… because they forgot that they also have to pay taxes. Mining rewards are income, and should be reported as such.

Cryptocurrencies earned through games of chance

If cryptocurrencies are earned by playing games of chance at online casinos, even if they are anonymous casinosWinnings must be reported. Casino winnings, lottery winnings, sports betting, sweepstakes, and contest winnings must be reported.

Under-reporting or misreporting income (even this type of income) is a serious problem for anyone and can lead to huge legal trouble. Therefore, this mistake should be avoided.

profit and loss account

Once you have identified all the taxable events, it is time to record all the income and expenses/costs on paper. First of all, you need to check for any taxable income. Just because some value is exchanged between two people does not mean that someone is better off than before. So, there are a few things to keep in mind.

Start by calculating the cost basis. This means that you should write down the exact date and time, as well as the amount of money that was originally paid for the cryptocurrency in question. This includes the acquisition fees.

Then, what is called fair marketAloe It must be provided. This is the cost of the cryptocurrency at the time of acquisition (at the time of the taxable event mentioned in the last section).

The most important part of this is what is called capital gains. This means that at the time of sale, the value of the crypto asset was higher than it was at the time of acquisition.

There is also the opposite scenario, where the market value is lower than it was at the time of acquisition.

Federal vs. Local Taxes on Cryptocurrencies

When it comes to federal income tax, the IRS considers crypto assets to be similar to real estate, meaning they are subject to capital gains tax rules.

Taxes vary from state to state. For example, there are states with income tax and states without, but there are also state-specific regulations, meaning that a state may offer tax incentives related to cryptocurrencies. An example of this is Wyoming, which is taking a proactive approach to creating a favorable regulatory environment for crypto businesses and users.

With more and more merchants accepting Crypto assets as paymentsThe issue of taxing these resources at the local and national levels has become more important than ever. The importance and adoption of crypto assets is sure to increase in the future, which is why understanding the regulations surrounding them has become a top priority for everyone.

The importance of reporting and keeping detailed records

Knowing how much to pay and paying is just one part of a long series of necessary tasks that must be completed in order to settle your tax obligations.

When it comes to reporting income from crypto activities, the correct forms such as 1040, 8949, and Schedule D must be used. It all depends on whether the money was earned from mining, storing, or selling and trading.

Most importantly, all detailed records should be kept. A detailed record of transactions should be kept with all receipts, statements and wallet addresses (for wallets involved in your transactions).

All of this can be made easier with the right tax software. The user should make sure to specify that they are looking for software that supports cryptocurrencies and crypto income. Let’s face it: in 2024, cryptocurrencies have become such an integral part of our finances that the demand is more than reasonable.

Cryptocurrency income is taxable; tax evasion can lead to serious problems

It’s 2024, and cryptocurrencies are no longer unregulated. They’re no longer small or insignificant enough to fly under the radar of the IRS. So, all responsibilities to the IRS need to be settled. All the resources on this topic are available, which is why the idea that someone doesn’t know how to do it no longer exists.