Most people have one common question when it comes to crypto trading: are my earnings taxable? Well, none of your payments can escape the tax laws, and cryptocurrency earnings are no exception. Ben Armstrong, a crypto trading expert, uses his YouTube channel, BitBoy Crypto, to answer the most frequently asked questions regarding crypto taxes.
Most people think that cryptocurrency taxes are too complicated to understand. Ben believes that figuring out the tax laws' basics can help answer many questions that traders may have.
1. Are crypto earnings taxable?
Yes, they are. Like you pay taxes for the salary, you also need to pay taxes for your crypto earnings. You must file your taxes to the IRS before the accounting year ends to eliminate the risk of tax fraud. It doesn't matter whether you exchange cryptocurrencies or convert them back to USD; if you make a profit, you must pay taxes for the respective amount. Tax fraud for crypto earnings may lead to a fine of around $250,000 and jail time of nearly five years.
2. What are the types of cryptocurrency taxes?
The IRS considers cryptocurrency as your digital asset and not just a currency. This means you need to pay your capital gains tax. Ben divides cryptocurrency taxes into two types: short-term and long-term. Short-term taxes relate to your digital currency holdings for less than one year. On the other hand, long-term taxes are applicable for holdings for more than a year before you sell them.
Are you confused about the total amount of tax you may need to pay at the end of the accounting year? Ben advises traders to use the IRS calculator to get an approximate amount. The calculator considers both your short-term and long-term holdings to provide a tax amount that you need to pay before the accounting year ends.
3. Should crypto miners also pay taxes?
Yes, there are tax laws for crypto miners also. Mining is considered self-employment, and if you are making money from it, you should pay taxes. The self-employment tax is around 15.3%. There is, however, no tax applicable to the purchase of digital assets. It's only when you sell and make a profit that you must pay taxes.
But what if you lose money while selling cryptocurrencies in mining? In that case, you can claim a loss. This will allow you to save significantly on your capital gain taxes.
4. Are crypto tokens exempted from tax slabs?
Tokens represent an asset or a service related to a specific cryptocurrency, but not as a currency. According to the IRS rulebooks, taxable crypto comes under virtual currencies and is equal to real currencies. Crypto tokens are not virtual currencies because they only represent assets or services. That's why the IRS exempts crypto tokens from its tax books. But Ben suggests you should always talk to a certified accountant or a lawyer before preparing your crypto tax files to know about the exemptions you are eligible to get.
Ben Armstrong says that it's not difficult to figure out your taxable income from crypto earnings if you follow the IRS rules correctly. He recommends traders to sit down with their accountants to list all the revenues and losses so that you can pay your taxes and avoid tax fraud cases.