As the popularity of cryptocurrencies continues to grow, so does the scrutiny from government agencies like the Internal Revenue Service (IRS). The IRS has been working hard to ensure that taxpayers who invest in cryptocurrency are properly reporting their gains and losses on their tax returns. In this article, we’ll discuss what cryptocurrency taxes are, how they work, and what you need to do to comply with the law.

What Are Cryptocurrency Taxes?

Cryptocurrency taxes are the taxes that you owe on any gains or losses that you realize from the sale or exchange of virtual currencies. The IRS treats cryptocurrencies like property, which means that any gains or losses you generate are treated as capital gains or losses (just like when you sell stocks, real estate, or other capital assets).

How Do Cryptocurrency Taxes Work?

Cryptocurrency taxes work similarly to other capital gains taxes. If you sell or exchange cryptocurrency at a profit, you’ll owe taxes on that profit. If you sell or exchange it at a loss, you may be able to deduct that loss to reduce your overall tax liability (although there are certain limitations when claiming capital losses). The amount of tax you owe on your cryptocurrency gains depends on how long the cryptocurrency has been held since the initial acquisition – if you own it for less than a year, your gains will be considered short-term and taxed at your ordinary income tax rate. If you hold it for more than a year, however, your gains will be taxed at the long-term capital gains tax rate, which is generally lower than the ordinary income tax rate.

What Do You Need to Do to Comply with Cryptocurrency Tax Laws?

If you’ve invested in cryptocurrency, it’s important to understand how to properly report your gains and losses on your tax returns. Here are some steps you can take to ensure that you abide by the law:

• Keep Accurate Records – The first step is to keep precise records of all your cryptocurrency transactions. Keeping track of the gain or loss from virtual currency trading is easy if you are using a broker that issues you Form 1099-B (Proceeds from Broker and Barter Exchanges). However, if you don’t use a broker who keeps records of your trading activity, you will need to do so on your own. This means that you must keep track of the following:

• Purchase Date
• Purchase Price
• Sale Date
• Sale Price

Don’t forget that sales aren’t the only form of taxable transactions. You must report the disposition of a virtual coin if it’s sold for cash, traded for another cryptocurrency asset, or used to buy something. It’s also important to note that virtual currency splits can create ordinary income, as can airdrops, mining, and staking.                                                                                                             

• Report Your Gains and Losses on Your Tax Return – When you prepare your tax return, you’ll likely need to report your cryptocurrency gains and losses on Form 8949, Sales and Other Dispositions of Capital Assets. You’ll also need to include the total amount of your gains or losses on Schedule D of your tax return.

• Pay Any Taxes Owed – If you owe taxes on your gains, you’ll need to pay them when you file your tax return (and they will be included in your overall tax liability on ALL taxable income). If you don’t pay your taxes on time, you may be subject to penalties and interest charges.

Conclusion

As cryptocurrency continues to become a more popular investment vehicle, it’s important to understand how to properly keep track of and report your gains and losses on your tax returns. The IRS is cracking down on these types of transactions, and you don’t want anything to come back and bite you later! As always, if you’re unsure how this applies to your specific tax situation, please consult with a tax professional.