Cryptocurrency Accounting for Taxes – How Do You Go About It?
When you start to get into cryptocurrency, you’ll need to know how to track and report your transaction for taxes. You see, governments want their money and will do just about anything to get it. So if you don’t follow the rules when it comes to reporting cryptocurrency transactions, they can come after your assets or put a lien on your property to collect what they’re owed.
Cryptos are digital money that’s not regulated by any government or central bank operating on cryptocurrency exchanges. It’s decentralized and operates independently of traditional currencies like the USD (US Dollar), EUR (Euro), GBP (British Pound), etc.
Cryptocurrency is stored in various software wallets on computers all over the world. So there’s no central storage facility where authorities could go grab some information about accounts and balances.
What Is Cryptocurrency?
Cryptocurrency is a digital asset and also a type of currency. The cryptocurrency space has been growing by leaps and bounds in recent years. You may have heard about bitcoin, but there are many other types of cryptocurrencies available today. Cryptocurrency can be used as a payment system to transfer money or make purchases online, over the phone, or through an ATM.
Since cryptocurrency is considered property for tax purposes, it must be reported on your taxes if you sold it at a profit during the year.
How do Cryptocurrencies work?
Cryptocurrencies are digital, decentralized currencies that are not controlled by a central bank or government. Instead, they’re controlled by a public ledger called the blockchain. The blockchain is where all transactions are recorded and stored so that anyone can verify their validity at any time.
The first cryptocurrency to be invented was Bitcoin in 2008. There are now over 1,000 different types of cryptocurrencies available today with many more being created every year. Cryptocurrency markets are extremely volatile with prices fluctuating wildly daily (sometimes up to 50% in one day).
Cryptocurrencies differ from traditional fiat currencies in that they’re not backed by physical assets such as gold or silver. Instead, they’re based on mathematical algorithms which help secure their networks and prevent counterfeiting and forgery.
Cryptocurrencies can be bought using conventional money via an exchange platform like Coinbase or Binance. However, most people purchase them using another digital currency such as Bitcoin or Ethereum first. It’s more convenient than buying from somewhere like Amazon which doesn’t accept cryptos yet.
Categories of Cryptocurrencies
Cryptocurrencies are a type of digital asset. They’re often confused with cryptocurrencies, but the two are quite different.
The key difference is that cryptocurrency is based on blockchain technology, which can allow users to make payments in a way similar to how email allows you to send an email message.
Cryptocurrency tokens also don’t have any physical backing; the only thing that backs them is trust (and maths).
These characteristics make cryptocurrencies very different from traditional currencies like the dollar or euro. It’s one of the reasons why there wasn’t much interest in cryptocurrencies until recently (when Bitcoin was first created).
Which Regulations Apply to Crypto Taxation?
To start, you need to understand that several different regulations apply to cryptocurrency taxation. These include federal tax regulations and state tax regulations, which are pretty self-explanatory. Local taxes also play an important role in your crypto tax preparation and filing process since they vary based on where you live.
International taxes have their own set of rules as well. Some countries allow for cryptocurrency transactions while others do not. A few examples of countries with strict international crypto policies include India, China, and South Korea. All three have banned crypto trading within their borders entirely.
Additionally, there are also other regulatory agencies such as the IRS (Internal Revenue Service) who guide on this topic too.
Who Pays Taxes on Cryptocurrencies?
Cryptocurrency taxes are paid by the person who holds the cryptocurrency. This means that if you buy cryptocurrency as an investment, any capital gains or losses that you have in your portfolio will be taxed on your taxes.
If you trade your crypto and make gains or losses, those are taxable events as well. They will be considered ordinary income (not capital gains) and can be offset by losses to lower your overall tax liability in that year.
You may want to take advantage of this tax benefit and plan on taking a loss on one of these trades. It’s important to note that even though they’re called “ordinary” income transactions, they must still be reported and tracked separately from other types of transactions like buying groceries or paying the rent with Bitcoin Cash (BCH).
How Are Taxes Calculated on Cryptocurrencies?
Taxes on cryptocurrency are calculated based on the value of the cryptocurrency at the time of the transaction. The value is determined by the cryptocurrency exchange rate. It is set by market demand for that specific coin or token at a given moment in time.
The way this works is fairly simple. When you buy something with your Bitcoin, it’s taxed as if it were cash because it was converted into dollars (or some other fiat currency) before being used to purchase a product or service.
If you trade one cryptocurrency for another, then sell it back again, either immediately or later. It’s also subject to tax rules just like any other financial transaction involving money changing hands.
Keep Detailed Records
You must keep detailed records of your cryptocurrency transactions. This means you need to record the date, time, dollar amount, and type of transaction (for example, purchase or sale).
You also need to record whether the transaction was made using U.S. dollars or Bitcoin (or other cryptocurrencies). Finally, be sure to record all relevant details about your cryptocurrency wallet provider: name, address, and phone number, for example.
You’re a business owner who accepts payment in crypto but doesn’t keep track of it separately from other income. It can be because you set up an OKX account and simply use their wallet service. However, it is essential to check the dashboard to get the details from time to time.