New technologies deliver an array of exciting opportunities, but they can also come accompanied by significant challenges — including, more often than not, tax issues. This is certainly true of the cryptocurrency market, which has seen its fair share of tax drama in recent years. The sooner you get a handle on crypto taxes, the better.
Paying Taxes on Cryptocurrency
How you proceed with crypto taxes will largely depend on how you earn your income. For example, if you purchase cryptocurrency and hang on to it for over a year before putting it back on the market, you’ll likely pay long-term capital gains upon selling. For most people, this amounts to a 15 percent tax on crypto gains, although some may be charged 20 percent based on higher earnings.
If you primarily earn by mining, any profits gained through this process will be treated as taxable income. Plan to highlight both income and related expenses on Schedule C — and to pay a self-employment tax. Unfortunately, this process can be made more complicated by differences in fair market value. Keep track of the evolving exchange value as you mine crypto and make transactions; this will make tax preparation a lot easier down the road.
The Consequences of Failing to Pay Crypto Taxes
Ignoring tax concerns may seem like the easiest approach, but it could ultimately prove costly. Early signs of trouble became evident when Coinbase was forced to provide the IRS with detailed information on 13,000 users. Initially, this crackdown was intended to involve all Coinbase users. Unfortunately, experts anticipate similar efforts in the near future.
Are you confused about the unprecedented interplay of taxes and cryptocurrency? You’re certainly not alone. You can benefit from the guidance of an expert who is well-versed in the crypto market and related tax issues. Call the Highland Tax Group today to learn more.