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5 Crypto Tax Myths that Could Land You in Jail

Opinion

5 Crypto Tax Myths that Could Land You in Jail

As a crypto holder, it is absolutely vital that you understand the laws regarding the declaration of crypto taxes, as the last thing you want is to get in trouble with the IRS. The IRS recently began sending out notices to 10,000 crypto investors that may have failed to declare properly. If you are one of these, this article will help you understand how to avoid such mistakes in the future.

Before we start busting myths, let’s take a closer look at what crypto taxes aka capital gains taxes actually are.

Understanding Capital Gains Tax

According to the IRS, anything you own and use for personal or investment purposes is a capital asset. Therefore, when you sell such an asset, the profit/loss from the sale is a capital gain. Cryptocurrency, which is classified as property, falls under this law and as such, can be legally taxed when you use it in transactions. This means you have to declare capital gains every time you trade or sell cryptocurrency.

There are two major forms to know about when dealing with capital gains taxes. The first is Form 8949, which deals with the sales and disposition of capital assets, and the other is Form 1040, which is for filing your gains and deductible losses on your crypto. You should always consider contacting a licensed professional if you need any assistance with filing your crypto taxes correctly.

The Myths

1. Only crypto $10,000 and above is taxed, anything below is for personal use.

Wrong. Unfortunately, this is a very popular misconception among crypto traders in the US today. Crypto is classified as property, and as such, falls under capital gains tax, therefore, any transaction you carry out (buying, selling, trading) is taxed. No ifs, ands, or buts.

Capital gains are taxed as either short or long-term gain, depending on the amount of time you have held the crypto. You are obligated to disclose every transaction you have made while filing your taxes.

2. Trading cryptocurrencies is not taxable as you are not converting it to cash.

Wrong. When you exchange cryptocurrencies, that is considered a purchase. The transaction legally attracts a tax because you are effectively using and spending crypto during a trade. For example, if you use your Bitcoin to purchase Dash, you have sold your Bitcoin to buy Dash – hence, a tax applies.

If you have engaged in any crypto trading, you should report it when filing your taxes to avoid any penalties, as the IRS will assume you are avoiding payment.

3. Gifts such as airdrops and other free tokens are not taxable.

Half-wrong. This is a gray area in the world of cryptocurrency taxation. More specifically, if you did something such as liking a facebook page or retweeting/registering on a platform in exchange for the tokens then that’s considered payment for a service which is taxed as regular income. However, if you received the airdrop without doing anything then its not taxed right away but is taxed as soon as you dispose of it.

Hard-forks are even trickier to classify for tax purposes as you end up with two tokens of almost equal or unknown value. This shady area in crypto taxation is because there are no clear guidelines from the IRS.

4. You do not have to pay taxes if you receive crypto as a means of payment.

Wrong. If you receive crypto as a means of payment for services rendered, it will be classified as compensation, and you will be naturally taxed within your income bracket. You may decide to hold on to your crypto after payment so as to avoid the capital gains tax; however, it still counts as income and is taxable under income tax.

Holding on to your crypto instead of immediately converting it to fiat can add an extra layer of complexity to your tax filing. You would need to keep accurate track of your crypto while holding it, as you would need to report the gain or loss when you eventually use it.

5. Crypto made from mining is not taxable.

Wrong. When mining cryptocurrency, all earnings upwards of $400 must be reported to the IRS. Generally, crypto miners are classified into two broad categories: Hobby miners and Business miners. These two categories are taxed in different contexts.

Hobby miners mine below $400 and do not partake in any business mining operations. The crypto received, in this case, would be treated as ordinary income and taxed as such. Business miners, on the other hand, are taxed under the self-employment tax code.

Final Words of Advice

Crypto taxes have recently become a serious issue for the IRS. The crackdowns on crypto traders and the crypto community have a lot of people scared. If you need help filing your crypto taxes (because we know it can be tough) you should get the help of a tax professional to assist you.

Hopefully you now have the knowledge to amend or file your tax reports correctly and can avoid waving a red flag to the bull (that is, the IRS). You are also encouraged to share this with others so they can become informed too.

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Robin is the founder of Koinly.io - a cryptocurrency tax solution that automatically generates capital gains reports. He is a former Fintech engineer with a knack for numbers. Besides being a crypto enthusiast, he is also a passionate gamer and can be found in Orgrimmar when not at his desk.

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