With the first quarter of 2020 right coming to an end, the tax season is already here. If you don’t know already, the last day to file taxes this year is April 15, 2020.
If you use cryptocurrency, then you shouldn’t forget to claim your crypto earnings on your income taxes. Otherwise, you might end up having a very unpleasant conversation with the IRS. In today’s article, we will explain to you how to file your crypto earnings on your income tax as well as what formalities to follow to avoid legal charges.
What Counts as Cryptocurrency?
Cryptocurrency is a buzzword that stands for digital currency. While it is correct, it is an oversimplification of a complicated subject matter. Cryptocurrency originally started as virtual tokens for online transactions to substitute real-world money ended up being something else altogether. Even to this day, it is unknown who is the actual creator of the cryptocurrency. But with its immense popularity, it evolved into something far beyond that.
What makes cryptocurrency unique is that it is encrypted and secured using cryptographic techniques, making it safe from counterfeit or double-use. Due to its volatile nature, a limit has been set for the total amount of cryptocurrency that can be ‘mined,’ making it a limited and sought after resource.
Unlike regular currency, which is issued and printed by the government, cryptocurrency is ‘mined’ from the internet using blockchain technology. Blockchains are private computer networks dedicated to the sole purpose of extracting and encrypting cryptocurrency. Due to its anonymous nature, legal and financial bodies around the world for the longest time found it difficult to regulate. But that situation is fast changing.
Don’t Forget to Claim Your Crypto Earnings on Your Income Taxes
Since 2014 IRS has classified cryptocurrency as ‘property,’ which is to be filed for income tax like any other assets. This means it is your job to filter out your cryptocurrency transactions from your online transactions and report them as cryptocurrency taxes. To claim cryptocurrency earnings on your income tax, you need to make sure that you fill out the right forms, which are Form 8949 and Form 1040.
These two forms have separate purposes. First, let’s take a look at Form 8949. You will be using this form to file your cryptocurrency transactions only. This form is primarily used to report transactions made from sales and exchange of capital assets. Since cryptocurrency is classified as an ‘asset,’ your cryptocurrency transactions need to be filed with this form. The form has two parts—one part is for reporting short-term sales while the other is for the long-term.
Now let’s take a look at Form 1040, also nicknamed ‘Schedule D.’ This form is primarily used for reporting your cryptocurrency income, not general transactions. Meaning if you are making money off cryptocurrency via forex, data mining, micro-tasking, etc. you will be filling out this form alongside Form 8949. Structurally similar to Form 8949, this form also consists of two parts. The first part of the form is used to fill in your personal details, while the second part is used to report your cryptocurrency income. This includes any wages, salary, taxable interest, capital gains, pensions, social security benefits, and other income you made via cryptocurrency.
Recommended Article: Best Cryptocurrency Tax Calculator For Crypto Tax
How to Avoid Large Fees
Since 2019, the IRS and US government have doubled down to regulate cryptocurrency. If you happen to be someone who falls under this category, then you will be receiving a call for them soon to file your cryptocurrency transactions and earning if you haven’t received one already. To avoid a lawsuit and hefty legal fees, you need to make sure that your cryptocurrency transactions are up to date and clearly filed under the proper income and transaction sections in the form. If you haven’t been filing your cryptocurrency earnings on your income tax records, then you should report all previous outstanding transactions with this year’s tax claims as well.
Cryptocurrency taxation is no longer a light matter. It is highly improbable to get away with not reporting your cryptocurrency transactions. So make the best of the legal advice provided in this article to keep your records clean and avoiding legal complications.
About the author:
By profession Ankit is an IT professional and also love to learn more and more about cryptocurrencies. His area of writing includes blockchain projects, trading, and also about the bitcoin capital platform.