Nowadays, many people have been getting into the world of blockchain technology and trading, and many may not realize that, unlike traditional trading methods, cryptocurrency investments are subject to tax obligations. Some people tend to ignore this aspect, which later becomes a menace in their investment journey due to huge penalties and audits or tax evasion cases. Cryptocurrency investments are supposed to be recorded for tax filing during tax season. For this matter, let’s go over some tax implications of investing in cryptocurrency.
Tax Basics for Cryptocurrency Investors
In the US, trading crypto is considered similar to real estate or stock trading meaning that cryptocurrency is considered as personal property that is supposed to be taxed. This implies that any transaction in the crypto arena is subject to tax. Unlike traditional currencies, you buy Bitcoin as the investor and own it like your personal property. You will have to be subjected to tax for it, just like how you would be subjected to tax for a real estate property.
Taxable Events in Cryptocurrency Investing
Every time a trader takes part in a transaction of digital assets, it is considered a tax obligation. When an investor makes a purchase or a sale, they undergo capital gains or losses, these depend on whether the particular currency has lost or gained value in the period within which the investor was holding it.
This is no different from the traditional methods of trading as you sell high and buy low. Similarly, when an investor trades one currency for another, they are supposed to record it as it will be obligated to be taxed. This also includes receiving funds or making payments using cryptocurrencies.
Reports to the IRS
The IRS requires investors to report their gains and losses on their capital and also every transaction that they make using cryptocurrencies. Transparency and compliance are essential attributes to have as an investor, which will ensure that you are safe from any tax evasion cases.
Failure to report and file taxes can lead to audits and large penalties that usually end up costing way more than the tax could have ever cost. Investors should make a habit of keeping clear records of every transaction to ensure transparency and consult professionals for tax assistance to ensure that they comply with the laws of their respective states.
Tax Strategies for Cryptocurrency Investors
There are plenty of tax strategies to ensure that an investor gets to minimize his tax liabilities, all while maximizing the tax returns depending on his level of risk tolerance. By taking advantage of tax-loss harvesting, an investor is able to offset their capital gains by selling the losing positions and ensuring that they have minimized their taxable income for the financial year.
Compared to short-term gains, holding positions for more than a year can qualify as long-term investments, which usually benefit from smaller tax rates. An investor can also choose to take advantage of retirement accounts like self-directed IRAs, which may allow them to defer some taxes.
Some of these accounts may allow an investor to avoid tax charges on investments altogether. To come up with an efficient tax strategy, one needs to conduct good research to ensure that whichever way one chooses is legal and acceptable depending on the tax implications and the state laws and regulations on investment.
Endnote
Failing to keep good records for tax or trying to evade it are some common pitfalls that many investors fall into. Mostly, tax reporting seems a trivial matter until tax season arises, and most find themselves making errors that increase the risk of penalties and audits. Investors should ensure they take the matter seriously to avoid cases of tax evasion and to secure their capital gains for their investment periods. With the ever-changing industry of blockchain technology, the clarity of tax compliance rules keeps on fading. It is essential to keep vigilance and do continuous research on what goes on in the industry to ensure compliance.
