ATTENTION! Save $1000’s on Your Taxes
The One Secret the IRS Doesn’t Want you to Know That Could Save You 17% on Your Cryptocurrency Taxes
We all know that investing in cryptocurrencies can be a profitable strategy, but how many of you know the ins and outs of tax law governing investment taxes?
Or even, what to put on your FORM 1040?
What about your Schedule A and Schedule D deductions?
If that sounds a bit confusing, then the information below is vital for your financial wellbeing.
What you’ll learn today can potentially save you thousands in taxes and also help you to avoid any possible penalties or fines that await the unwary investor who doesn’t do their homework or fails to heed their tax professional’s advice.
So, let’s get started…
What You’re Going to Discover In This Article:
- What are cryptocurrencies?
- How to invest in cryptocurrencies?
- How much to invest in cryptocurrencies?
- Why cryptocurrency investing is risky.
- When will you profit from trading cryptocurrencies?
- How to mine cryptocurrency.
- What costs are involved in investing in cryptocurrency?
- The two types of wallets you will need to keep your investment safe.
- How the IRS treats cryptocurrency profits and losses.
- The pitfalls of buying products and services with cryptocurrency.
- Calculating your liability for potential capital gains tax and sales tax.
- Costs, expenses, and capital allowances you can legally use to reduce your tax liability.
- How Taxleaf can assist you in safely investing in cryptocurrencies.
What are Cryptocurrencies?
Cryptocurrencies are a form of digital cash. Unlike traditional currencies or “fiat” currencies, cryptocurrencies are not backed by governments, nor are they regulated by governments.
Currencies like Bitcoin, Ethereum, Litecoin, and many others are digital tokens or “coins” that exist in a digital ledger referred to as the blockchain.
You can either buy or sell cryptocurrencies using regular cash via an exchange or you can mine cryptocurrencies and receive coins as a reward for solving complex algorithms that are used to verify transactions on the blockchain.
How to Invest in Cryptocurrency
Due to the cryptocurrency industry’s somewhat exotic status, you need to jump through a few hoops to invest, as your local bank or brokerage house is unlikely to have the facilities to process your trades.
But before you jump into trading, a few ground rules need to be put in place first:
- As with all high-risk investments, never invest more than 5-10% of your total portfolio in cryptocurrencies. Some advisors would even reduce this to 1-2% maximum of your available investment funds.
- Cryptocurrencies do not pay dividends. In this, they are very much like precious metals like gold and silver or other commodities such as oil. You will only profit if there is a significant price increase or if you day-trade the swings in price movements. Buy and hold is a great strategy if the prices increase but you will not receive any income from your investment while you’re waiting for your big payday.
- Cryptocurrencies are mediums of exchange. They are not designed as investment vehicles. That means that if interest in your investment currency drops off and fewer and fewer people use it, you could be left with a worthless heap of electrons at the end of the day. Don’t invest what you can’t afford to lose and don’t borrow money to invest in cryptocurrencies.
- You can purchase a mining rig and mine cryptocurrencies at home or you can rent space in a server farm and have a professional team look after your equipment for you. The upfront cost of a rig is not cheap, neither is electricity nor is air conditioning to keep everything from melting. The upside is that your cost of mining is a tax-deductible expense.
- There are costs involved in trading in cryptocurrencies. These costs are set by the trading platform you choose to use. The larger exchanges offer a secure way to buy and sell cryptocurrencies for a cut of the value of the trade. There are also small fees levied on the cost of verifying your trade.
- You will need a wallet. A wallet is a secure digital device to store your cryptocurrency as it is not a good idea to leave balances lying around in your trading accounts. You can use a hardware wallet or a software wallet, depending on your needs and the level of sophistication required.
How the IRS Treats Cryptocurrencies
The IRS regards cryptocurrencies as capital assets and taxes profits at the date they are sold. You can compare this to the tax on traditional investments like stocks or funds.
Capital Gains Tax
However, the rules regarding the timing of your profits or losses come into play when you sell your crypto investments.
An understanding of these rules is crucial to ensure that you are taxed at lower rates. Short-term capital gains rates for investments held for less than 12 months are much higher than the long-term rates.
The far lower rates that apply to long-term gains (greater than 12 months) can translate into a difference which can be as much as 17%, at the higher end of the income tax brackets.
If you use your cryptocurrency to pay for goods or services, then you become liable for sales tax.
Further Tax Complications
What’s more, you will need to calculate whether or not you have made a profit or loss on the date of the transaction and make a calculation concerning the capital gain or loss you may have incurred.
This means you are potentially liable for both sales tax and capital gains tax on a purchase transaction.
If you trade regularly, you will need a system to record and keep track of the income and expenses related to your trading activities as well as any purchases of goods or services.
Even More Tax Complications
If you also have investments in mining equipment and have tokens that you received from your mining activities, you will be taxed on those tokens as if they were your regular income.
This means you have to calculate what the tokens are worth on the day you earned them and then calculate all your expenses related to mining those tokens, including any capital allowances such as wear and tear to which you may be entitled.
As trusted advisors and tax consultants to businesses and individuals for over 50 years, Taxleaf provides payroll, bookkeeping, and accounting services and is uniquely placed to assist you with the tax complexities associated with your cryptocurrency taxes.
For more information about this matter, please visit our Landing Page on Cryptocurrency
Alternatively, call us to secure your 30 minutes FREE-CONSULTATION with a Qualified Tax Advisor!