Whether or not you pay taxes on your cryptocurrency holdings will rely on a variety of factors. Cryptocurrency is considered property by the IRS and is currently taxed in a similar way to stocks. However, if all you did was purchase digital currency with U.S. currency and it’s been sitting untouched in your wallet or an exchange, you may not need to report it.
You will need to report your cryptocurrency if you’ve traded one type of the digital currency for another or if you’ve sold cryptocurrency for government-issued currency known as fiat dollars. Similarly, the currency may be taxable if you’ve used it to purchase services or goods ranging from a cup of coffee to a new car.
Using cryptocurrency doesn’t necessarily mean you’ll owe taxes on it, though you’ll need to report the transaction. Selling an asset such as cryptocurrency can be subject to a capital gains tax. Gains are taxed at either short or long-term rates. It will depend on when the digital currency was acquired and the date it was sold or disposed of, along with the amount you paid combined with any transaction fees.
Defer or Eliminate Taxes
You may be able to defer or completely eliminate, taxes on cryptocurrency holdings if you purchase inside an IRA, 401K or other retirement plan. Buying within a traditional IRA will defer taxes on the gains until you begin making distributions.
Hire a Professional
Cryptocurrency is still a gray area in the U.S. in many ways. It can be difficult and confusing to navigate the laws surrounding the digital currency. If your cryptocurrency history is complex, the expertise of a tax attorney can be invaluable when filing your yearly taxes. They can present you with strategies that are acceptable to the IRS for accounting for gains and losses.
At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs. We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!