This is a guest post from TaxAct
Taxes are an inevitable fact of life for everyone no matter what one thinks about it. As Benjamin Franklin famously and aptly puts it, it is the only certain thing in the world aside from death. Cryptocurrency miners are not exempt from paying taxes. In fact, the IRS is quick to remind people and businesses who earn from virtual currency transactions to report their earnings in their income tax return yearly as seen in this year’s IR-2018-71. But what exactly do you need to remember when paying cryptocurrency taxes for your 2019 return? Here are some crucial things to keep in mind when dealing with the taxman about your virtual earnings.
What Virtual Currencies are Taxed?
According to IRS Notice 2014-21, cryptocurrencies that can be exchanged for real currency (such as Bitcoin) are the ones that are taxable. However, these virtual currencies are not treated as currency but as business, investment or personal property. This means that the same principles of issuing and declaring taxable properties apply to your virtual money, according to the government agency.
How Your Taxes are Classified
The IRS tax virtual currencies depending on what entity you are (individual or business) or how you acquired it. Payments for goods and services are considered as part of your business or individual gross income in your tax return. Meanwhile, withholding and payroll tax applies if you work as an employee and get wages in crypto money. If you are a cryptocurrency mining hobbyist, successful transactions or activities are covered under your gross income as well. Your earnings are subject to self-employment tax if you do mining as an independent contractor or business.
Track Your Virtual Earnings
Since cryptocurrencies are treated as property and not as money, filing it as part of next year’s income tax returns can be quite tricky or confusing especially for miners. The fair market value of your mining transactions can also change dramatically. Therefore, it is important to keep tracking all of your transactions within the year to avoid slip-ups in your tax return. Keep all the related information about these transactions as well, as you might need it for your return.
The Issue of Losses
Another somewhat complex factor to deal with when it comes to filing your cryptocurrency mining transactions in your return are losses. The IRS determines gains and losses from these transactions depending on whether it is considered a capital asset on your part. If you have losses on a cryptocurrency transaction that you own for personal or investment purposes, then you might be eligible for a tax deduction. If you’re unsure, it’s best to consult an accountant or tax professional about it.
Summing It Up
Cryptocurrency taxes are fairly new and a bit tricky to handle as compared to other types of taxes. However, it can eventually be easier to understand and file on your tax return in time. As long as you stay updated and continue to keep a record of all your transactions using effective tools, filing next year’s return will be a cinch.
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