Guide to Paying Taxes on Cryptocurrency Income

Many people misunderstand cryptocurrencies, thinking that their anonymity hides them from the IRS. In reality, cryptocurrency income is taxable. Here’s a guide on how to pay in 2024.

Many people still have misconceptions about how cryptocurrencies work. They have heard that cryptocurrencies offer a certain anonymity, which leads them to mistakenly believe that even the IRS will not be able to track the amount of cryptocurrency income they receive.

However, this is not true. Not only do you have to pay taxes on your crypto income, but you also have to follow a strict procedure. Here’s how you can pay taxes on your crypto income in 2024.

Understanding Taxable Events

The first thing you need to understand is the taxable events in question. There are many different ways to earn income from cryptocurrencies, and identifying some of these events will help you establish the proper procedures for making these payments.

Cryptocurrency Exchange

Selling one cryptocurrency and buying another is subject to taxes. This is important because new promising cryptocurrencies appear every day and it is often difficult to keep track of them. According to cryptocurrency expert Michael Graw, most people are interested in the potential for high profits, while some are even motivated by the promise of early investments.

Most importantly, every time a person makes a transaction, they must report the fair market value of the cryptocurrency received. This is a huge obligation that many cryptocurrency traders overlook.

Purchase of goods and services

Cryptocurrencies can be used to purchase goods or pay for services. In most countries, states, and jurisdictions, they are subject to tax. However, determining this tax is much more difficult when it comes to cryptocurrencies.

Ultimately, the client has the exact time of the transaction, and during the reporting process, they must report the fair market value of the cryptocurrency used in the transaction. To some, this may seem as simple as stating the price in their fiat currency, but it often ends up being a bit more complex.

Cryptocurrency Sale

Any time a cryptocurrency is sold for a fiat currency (like USD or EUR), it is considered a taxable event. In this case, capital gains and losses must be reported. This is actually a more standard form of the taxable event we described when we talked about cryptocurrency trading.

Ultimately, this is more or less always the end goal of cryptocurrency trading. The adoption of cryptocurrencies is not yet as high as someone will be able to use them for all their acquisitions. In other words, eventually exchanging them for fiat currencies is what people are looking for. Keep this in mind before you do it.

Cryptocurrency Mining

Cryptocurrency mining is already expensive. You have to buy the equipment, invest in proper software licenses, install everything, and pay a huge electricity bill. In the current climate, it’s questionable what kind of returns you’ll get.

The last thing anyone wants is to calculate all of these expenses and figure out if they’ll be able to break even (or even make a profit)… because they forgot that they also have to pay taxes. Mining rewards are income and should be reported as such.

Cryptocurrencies earned through luck-based games

If cryptocurrencies are won by playing games of chance at online casinos, even if they are anonymous casinos, the winnings must be reported. Casino winnings, lottery winnings, sports betting, raffle prizes, and sweepstakes all need to be reported.

Underreporting or misreporting income (even in this form) is a serious problem for anyone and can lead to serious legal trouble. Therefore, this mistake should be avoided.

Calculating gains and losses

Once all taxable events have been identified, it is time to put all income and expenses/costs on paper. To start, all taxable income should be verified. Just because something changes hands does not mean someone is better off than before. So there are a few things to consider.

Start by calculating the cost price. This means that the exact date and time must be noted, as well as the amount of money that was originally paid for the cryptocurrency in question. This includes acquisition costs.

Next, you need to provide the market value, which is the cost of the cryptocurrency at the time of its acquisition (at the time of the taxable event mentioned in the last section).

The most important element of all this is what is called capital gains. This implies that at the time of sale, the value of the crypto asset was higher than at the time of acquisition.

There is also the opposite scenario, where the market value is lower than it was at acquisition.

Federal and local taxation of cryptocurrencies

For federal income tax purposes, the IRS treats cryptoassets as real estate. This means they are subject to capital gains tax rules.

Taxation varies from state to state. For example, some states have income tax and others don’t, but there are also state-specific regulations, meaning that the state in question may offer tax incentives related to cryptocurrencies. Wyoming is one such example, as it is very proactive in creating a favorable regulatory environment for cryptocurrency businesses and users.

As more and more merchants accept crypto assets as a means of payment, the issue of taxation of these resources at the national and local levels becomes an even more important issue than before. The importance and adoption of crypto assets is set to increase further in the future, which is why understanding the regulations surrounding them becomes a top priority for everyone.

Importance of reporting and keeping detailed records

Knowing how much to pay and simply paying is just one of the many tasks involved in settling your IRS obligations.

When it comes to reporting income from cryptocurrency activities, one must use the correct forms like 1040, 8949, and Schedule D. It all depends on whether the money was earned through mining, staking, or selling and trading.

The most important thing is to keep all detailed records. A detailed transaction history with all receipts, statements and wallet addresses (of the wallets involved in your transactions) should be kept.

All of this can be made easier by using the right tax software. The user should make sure to specify that they are looking for software that supports cryptocurrencies and crypto income. Let’s face it: in 2024, cryptocurrencies are such an essential part of our finances that the demand is more than reasonable.

Crypto Income Is Taxable; Tax Evasion Can Lead to Serious Problems

It’s 2024 and cryptocurrencies are no longer unregulated. They’re also no longer small and insignificant enough to fly under the IRS radar. Get all your IRS liabilities sorted out. All the resources on the subject are out there, so the idea that someone doesn’t know how to do it is no longer valid.