Every year, millions of people file their taxes, either using tax preparation software or just doing it by hand. And things generally work out fine for these people.
However, others recognize their tax situations are too unique or complicated to file themselves, avoid conflicts, or maximize benefits. Trading cryptocurrency can prove to be one such complicating factor.
It can be challenging for frequent traders to report their gains and stay compliant with IRS requirements accurately. It’s advisable for those with a rudimentary understanding of cryptocurrency regulations to work with a reputable firm that offers crypto tax accounting services. If you think you may fall into this category, read on to the following scenarios at which a specialized accountant can be of benefit.
1. Hard Forks
In some cases, new coins are received after a hard fork. A hard fork is a change to a blockchain network protocol that renders previously invalid transactions valid. The difference can be accidental or intentional, splitting a single cryptocurrency into two.
The IRS treats this as ordinary income; therefore, the new coins are taxable due to the fork. Working with an accountant that understands this element will be handy when filing taxes.
A specialized accountant will also understand crypto airdrops, which are free tokens or giveaways during a promotion. According to the IRS, the new coins earned through an airdrop are ordinary income. Therefore, taxes are owed.
The calculation of the income amount depends on the coins’ fair market value when they are received in a wallet. An accountant will help prepare this data and make the right calculations.
3. Capital Assets
You need to know that the IRS treats all virtual currencies as assets, so any gains made from sales or transfers of the coins are income. This means they are taxable. In the same vein, you’re allowed to report losses if transfers or sales result in capital losses.
If you transact using virtual currencies, bear in mind that you’ll need to report the transactions on your tax returns. This is something that a professional accountant can help you with during tax time.
Crypto coins are a digital representation of value. As such, they function as a medium of exchange. If you use them in making purchases, all standard tax rules apply.
According to the IRS, using virtual currencies to pay for goods or services incurs tax consequences. If you use crypto coins in meeting your business expenses, your accountant will help you know the taxable amounts and those that are deductible.
5. Crypto Mining
So, what are your taxpayer responsibilities when engaging in crypto mining? In this case, a specialized accountant will teach you more about the IRS 8949 cryptocurrency tax form, which is essential for reporting gains and losses in crypto transactions.
Mining crypto coins has tax implications, which your accountant will help you understand. There are separate forms you’ll need to fill. You need to know the mining process’s different taxable events—mining itself and selling the mined coins. The good thing is that you can make deductions, such as equipment, utilities, and repairs.
6. Cryptocurrency Swaps
Working with a specialized accountant also helps you learn more about cryptocurrency swaps. Also known as token swaps, crypto swaps involve exchanging one currency for another at a predetermined rate.
Although there isn’t any direct tax code for crypto swaps, you can gain additional coins during the swap, and they are taxable. The extra coins are capital gains, and you’re responsible for the taxes.
7. Losing Money
Since the IRS treats cryptocurrencies as property, you can report both gains and losses when filing your tax returns. When you lose money in cryptocurrency activities, it’s essential to claim the losses on taxes.
When filing your returns, you have a few options if you have losses. You can carry forward the losses to offset your crypto gains in the future or offset other capital gains. It’s also acceptable to deduct up to $3,000 of your losses from your total income. Still, you can carry forward the remaining losses.
Work with a Crypto Accountant!
The popularity of virtual currencies has made them ideal for trading and purchasing goods or services. As an alternative medium of value, crypto transactions are on the IRS radar. As such, they might be taxable or deductible, depending on your case. The best way to learn more about the transactions and calculations is by working with a specialized accountant.