The tax code of the IRS is a bit complicated in the United States. Here are a few rules that will help in lowering the amount that you pay via taxes and also save huge money from it.
Capital Losses incurred from Crypto Trading
The IRS has provided guidance that digital currency is an asset. At the time you trade your crypto asset, it causes the generation of a capital event. If the amount received as the result of the disposal comes out to be lower than the price of the asset, then it implies that you incur a capital loss.
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Tax Filing Software for Cryptocurrency
Calculating cryptocurrency can get complex sometimes. Proper record-keeping requires trade-by-trade records. It includes every single thing from the timestamp to the cost of the online assets that you are trading.
A service such as Coin Tracker assists you in the calculation of your capital gains. It prepares your crypto taxes. The software safely synchronizes the transaction history from famous exchanges and wallets across a thousand different cryptocurrencies to offer a duly-filled IRS Form 8949.
Capital Gains Rates
There are two rates in which capital gains can be taxed. It depends on the duration that the assets are held. For example, if they are held for 1 year or less, then any profits are considered to be the short-term capital gains.
On the contrary, if the money is held for more than a year, then it attracts long-term capital gains. In such a scenario, these gains are taxed around 0% to 20% as per the ordinary rate of income tax. This is the lower scenario of how the tax is the field for cryptocurrency.
Margin Loans Using Your Cryptocurrency
There are certain services such as BlockFi that enables you to collateralize the cryptocurrency such as Bitcoin, Litecoin, or Ether,) in exchange for a US dollar loan.
Disposal or trading of your cryptocurrency or collateralizing crypto to obtain a fiat loan isn’t a taxable event. This implies that you use a margin loan in this form if you don’t wish to liquidate your cryptocurrency but want liquidity.
Guidelines for filing Tax incurred on a cryptocurrency
The IRS hasn’t specified any for calculation of capital gains on digital currency transactions. You need to apply either the FIFO rule or First in First out technique or the specific identification technique.
Under the First in First out technique rule, the first coin(chronologically) that is bought is the first coin that is counted for a trade. In case of specific identification, you get the facility to choose which coin to sell in a transaction. It can be ad-hoc, or as per a pattern such as head in first out (HIFO), or last in first out (LIFO).
Conclusion
Tax filing for the cryptocurrency is a little complex process that can be difficult for the one who has no prior experience. It is important to get the assistance of a tax filing software, and financial advisor to guide you the right way to do it and make things simpler.