HQ Tax and Financial has taken the initiative to research Cryptocurrency taxation and offer proper guidance to its clients. Cryptocurrency, also known as crypto or virtual currency, is any form of digital money that uses cryptography to validate transactions. Cryptocurrencies use a decentralized system to record transactions in distributed ledgers (Blockchain) and issue new units. Virtual currency that has an equivalent value to real currency, or that acts as a substitute for real currency, is called “convertible” virtual currency. Bitcoin is an example of a convertible virtual currency. It can be traded digitally between users in various real or virtual currencies. The Internal Revenue Service (IRS) is well informed that “virtual currency” can be used to pay for goods or services, or held for investment, which may result in a tax liability.

If you earn cryptocurrency by mining it, or receive it as a promotion, salaries, wages, rent, annuities, premiums, or as payment for goods or services, it counts as part of your regular taxable income. You must tax the full fair market value of the cryptocurrency on the day you received it, at the normal tax rate. And if you own the same cryptocurrency that you mined or earned from these companies, its value increases and you spend it or sell it later at a profit, you would also owe capital gains taxes on the profits, based on how long you’ve held it. Capital gains are taxed differently depending on whether they are a short-term capital gain (for assets held for one year or less) or a long-term capital gain (for assets detained for over a year).

Short-term capital gains are taxed at the ordinary tax rate, while the long-term capital gains tax rate varies and can be as high as 37% in some cases. But with a little tax planning, this amount can be significantly reduced and could go as low as $0. The 3 main variables that affect your eligibility for 0% tax rates are filing status, annual income, and how long the asset was held before it was sold. The IRS treats cryptocurrency holdings as “property” for tax purposes, which means your virtual currency is taxed the same as any other asset you own, such as stocks or gold. Things start to get taxable when you use cryptocurrencies as a method of exchange. You may need to include these in your tax forms, even if you didn’t make any money.
Under currently applicable law, virtual currency is not treated as a currency that may give rise to foreign exchange gains or losses for US federal tax purposes. Just purchasing virtual currency with U.S. dollars and keeping them in the exchange in which you made the purchase or transferring it to your personal wallet does not mean that you will have to pay taxes at the end of the year. If your only cryptocurrency-related business this year was buying virtual currency with U.S. dollars, you do not need to report it to the IRS, per your tax return instructions on Form 1040. In prior years there was no specific tax form for cryptocurrencies, some exchanges were using Form 1099-K to report cryptocurrency activities. Some were not providing any information on gains and losses.
As a result, the information reported to the IRS by exchanges has been worse to non-existent for a long time. This has led to reduced tax compliance rates among cryptocurrency users. Because clients do not receive a form at the end of the year, they mistakenly believe that there is no business to report and no tax to pay. A Bloomberg article indicated that the IRS would soon unveil a new version of Form 1099: Form 1099DA.

This form is specifically designed to handle the reporting of cryptocurrency and digital assets to the IRS on annual basis. In November 2021, the US Infrastructure Bill was converted into law by President Biden. The bill stated that cryptocurrency exchanges would be required to report their customers’ capital gains and losses, gross proceeds, dates of purchase and sale, and cost to the IRS through 1099 forms starting in the 2023 tax year. In this scenario, exchanges will issue form 1099-DA to their customers in the first quarter of the 2024 tax year. The IRS has recently started sending letters to cryptocurrency investors advising them that they may owe taxes on unreported income and that they should submit amended returns.

The IRS letters (Letter 6173, Letter 6174, and Letter 6174-A) are all exceptional in nature, however, all of them start the identical way: “We have information that you have or had one or more accounts containing virtual currency.” If you have already reported your crypto activity, you may have received one of these letters again. Although you may believe that you have accurately reported income from your cryptocurrency investment business, we do suggest reviewing the previous years’ returns and ensuring income was recorded correctly. For those of you who have not accurately reported your cryptocurrency trades, or even worse, those who have never reported cryptocurrency activity, you should make sure to follow the instructions from the IRS and amend your tax return to get it up-to-date and compliant. After receiving one of these letters from the IRS, taxpayers who plead ignorance for their lack of reporting will be much harder to defend. Simply upload or add the trade from the exchanges and wallets you’ve used, plus any cryptocurrency you already own, and we’ll calculate your capital gains.

A professional and expert cryptocurrency tax accountant can:

  • Understand cryptocurrencies and be able to discuss them with you
  • Help track and report missing or lost recordings
  • Reconcile all transactions
  • Provide tax planning and strategies to identify crypto and non-crypto transactions
  • Serve as a representative before the IRS to resolve your case
  • Respond to IRS letters, audits, and other inquiries
  • Represent and coordinate with federal law enforcement in their defense
  • Compare using multiple cost basis methodologies, including FIFO, LIFO, and average cost, and compare similar treatments.
  • We will present your capital gains report with details on the basis of each transaction’s costs, proceeds, and gains. • A revenue report with all calculated mined values.
  • A donation report with information on the cost of gifts and tips.
  • A margin report showing gross margin trading profit (Kraken only).
  • And your final report with your profits and your cost base in the future.

Presently, Form 1040 enquire that is there any virtual currency transaction during the tax year. If YES, the following points must be kept in mind:

1. Maintain the records of all cryptocurrency transactions including purchases, sales, and each receipt in regards.

2. Fill Out the below-mentioned Tax Forms accurately.

Form 8949: This form lists every purchase or sale of crypto as an investment. It must present the total number of coins acquired and sold along with their dates, costs, prices, gains, and losses.

Schedule D: This form shows the total capital gains and losses from all investments, including cryptocurrency.

Schedule C: If you received coins from mining, you must indicate whether you received them for business or as a hobby. If you run a cryptocurrency mining business, you may have to pay self-employment taxes if your income exceeded your expenses for the year.

Schedule 1: If you report your cryptocurrency mining as a hobby, you will report this income on line 8 of this schedule. You won’t have to pay self-employment tax, but you will become more limited on what you can deduct as an expense.

How to Minimize Crypto Taxes?

If you think you might owe cryptocurrency taxes in the future, here are six ways to help minimize them:

1. Hold Cryptocurrency for the Long-Term

2. Offset Gains with Losses

3. Time Sales with Your Tax Rate

4. Claim Expenses for Mining

5. Consider Investing Through a Retirement Plan

6. Donate to Charity

Let HQ Tax & Financial take care of all your cryptocurrency taxation, so you can focus on trading, investing, mining, and making money.

Professionally, we are one of the best cryptocurrency experts in the United States. We serve both cryptocurrencies and the traditional tax needs of our clients. Your tax return will always be prepared by an expert with extensive knowledge of tax structuring, deductions, and credits which will allow you to maximize your tax refund or minimize your tax payable.

Filing your tax return with the help of a cryptocurrency-savvy accountant can help minimize the potential for an audit.

HQ Tax & Financial thrives when clients can save on taxes they owe. The success of the company is based on training, preparation, and experience. Our representatives are available throughout the year to meet your tax needs and answer all your questions. We provide IRS audit defense plan for our clients involved in cryptocurrency activities. We represent our clients in dealing with IRS audit, and we also provide assistance to tax practitioners in handling IRS audit for their clients. We will work together to resolve any cryptocurrency-related tax issues that may arise. No matter how complex your crypto tax issue is, HQ Tax & Financial  is here to support you with guidance and creative solutions.

Careful tax planning is essential for success in the unpredictable and volatile cryptocurrency economy. HQ Tax & Financial  focuses on our taxpayer’s objectives and formulates a consistent strategy in order to limit their tax liability and preserve wealth. We assist our clients with the intricacies of tax accounting and cryptocurrency compliance. These services include but are not limited to how to treat initial coin offering (ICO) transactions by both investors and developers and how to navigate the intricacies of reporting foreign financial assets and foreign bank and financial accounts. Stay up to date on the latest trends, news, and all things cryptocurrency! We publish information related to cryptocurrency tax services, mining, forking, lending, Defi, NFT, and recent IRS guide, how to track your capital gains base, and more! Be sure to follow us on Twitter, LinkedIn, or any other social media platform to have cryptocurrency tax-specific blog posts delivered directly to you.

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