How to Pay Taxes on Cryptocurrency: A Guide for New Investors

Paying taxes is confusing enough without introducing entirely new currencies, but here we are in 2020 fielding questions about how to pay taxes on cryptocurrency. It’s a fair concern with the growing use of crypto for transactions and investments.

In the following article, we’ll be simplifying the process. There are five basic considerations you need to remember. Let’s begin! 

1. Get Familiar With IRS Rules on Cryptocurrency

The IRS may be having trouble processing the backlog of tax returns for refund payments, but they’ve done their homework on the various e-currency denominations. Cryptocurrency losses are currently handled through IRS Form 8949.

Aside from that, the IRS has published a lengthy guideline for virtual currency transactions on their website. It can be found at this link. 

2. Ignore the 1099K Form

Most of the exchanges you use will send you a 1099K form reporting all of your transactions at the end of the tax year. However, these can be deceptive as they fail to show net gains and losses.

The IRS treats virtual currencies largely like an investment, and those investments, when sold and reported, are handled as capital gains or losses. Can the IRS track Bitcoins and other e-currencies on their own so you don’t have to? Yes, but it’s best to avoid the headache of having them dig that far into your tax return.

3. Identify the Specific Cryptocurrency You Are Selling Off

Not all cryptocurrencies are created equal. A gain or loss on one form won’t be the same as another. Therefore, make sure you’re being very specific about the e-currencies you’re disposing of.

If possible, this will allow you to lower those capital gains and your overall tax liability. See a Bitcoin tax accountant if you are confused about how to manage this.

4. Track Everything

Trading virtual currencies usually requires much faster and more frequent activity than a traditional stock or mutual fund. As a result, you could find yourself getting lost in the sheer number of trades that you made in a given year, and that can cause problems at tax time.

Make sure you’ve logged all those losses, gains, and break-evens, so you’re not falling into the trap of misreporting your earnings. However, don’t think your trades are all you need to worry about.

5. This Includes Transactions Outside the Exchanges

There are many other ways cryptocurrencies can affect your tax bill. If you receive payments from cryptocurrencies that pay dividends, don’t forget to report those. At the same time, track any payments sent and received using cryptocurrencies, including the use of a paystub generator if you are using virtual currency in a business transaction with an employee or contract worker.

Learn How to Pay Taxes on Cryptocurrency to Stay in the Game

We hope this inside look has demystified virtual currencies and taxes for you. Once you know how to pay taxes on cryptocurrency, you will feel more comfortable using it in business transactions and investments. For more news and tips on the world of virtual currency and blockchain in general, make sure you check out some of our other coverage.