Taxes in the cryptocurrency space have become a norm despite the  decentralization fundamentals of the ecosystem. Interestingly, the world leader, the United States, is not left out. However,the process of taxing differs from country to country but for the US, it is a necessity. This is because millions of US residents are involved with investing or trading cryptocurrency.

For some, they are involved in the crypto mining business which consumes a lot of electricity. So, in this article, we will take you through all the crypto taxing policies in the United States. If you are a complete beginner and US resident, just grab a seat and take note of all these important details.

Why Crypto Taxes In the United States?

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There are several reasons that the United States government makes sure that the crypto community pays taxes. Before now, cryptocurrencies were seen as illegal in the country. Some quarters referred to them as threats to the government and the United States Dollar. However, with more citizens joining the ecosystem, it has become important that the regulatory bodies succumb to the demand of the people. That then, leads us to the reason the United States had made taxes mandatory. As stated on platforms like https://bitcoin-profit.app/, it is necessary to follow regulations. So, let's look at some reasons crypto taxes are important in the States.

  • Regulation is law and must be adhered to: The first reason crypto taxes are important is because it is law and the policies must be followed. Although cryptocurrency preaches decentralization, the re-occurrence of hacks and exploits made it necessary for regulators to get involved. In addition, there were discussions about people using these digital assets for illegal activities like phishing scams and money laundering. So, as an individual crypto trader or organization, the United States requires a tax on capital gains. However, these taxes must be owned for at least one year before the regulators deduct significant taxes from investors holdings.
  • Taxes from capital gains only: According to the US Internal Revenue Service (IRS), crypto taxes are not taken from investor capital. However, there are two different ways of deducting takes. First, it's with the short term gains. For others, it's deductions from long-term holdings. So, how do the short term taxes differ from the long-term ones? We will break it down for you in this article. In addition to these, taxes also depend on the worth of the investor and income of the participant. In general, long-term holders pay a 0% to 20% tax, that is if they hold the assets for more than a year. However, for short term traders, taxes are higher. The Internal Revenue Service demands 10% to 37% tax on gains on profits derived from trading cryptocurrencies.

Besides the reasons above, there are hardly any other reasons why the United States government requires taxes from crypto investors. However, there are steps involved in paying these taxes and these procedures must be followed duly. So, what are the steps involved in paying taxes as a crypto trader or investor in the US? Let's get right into it.

The Process of Paying Cryptocurrency Taxes In the United States

The Process of Paying Cryptocurrency Taxes In the United States
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The Process of Paying Cryptocurrency Taxes In the United States

If you are a US resident and want to pay taxes on your crypto investments, then you should not skip this part. This is because this section duly explains the step-by-step process of paying the required taxes.

Step 1: Report All Crypto Transactions to the Authorities

The first step to paying crypto taxes in the US is letting the authorities know of your involvement in the venture. Hence, it also becomes necessary that you report all of your transactions to the same authorities.Not only do you need to report your buys but all of your traders. These traders would include spot trading, futures market profits, and long-term holdings. This report will help the regulators assess how much you've earned, lost and how much you should be taxed.

Step 2: Assess the Profits and Losses

Following your reply your profits and losses will be assessed. Once this is done, calculating your taxes becomes easy since you will only be taxed from your capital gains and not the capital itself. However, the volatility of the crypto market sometimes makes it difficult for taxes to be deducted.

For example, you might make profit from the Bitcoin market when the price is $65,000. It is possible that the authorities might require tax when the price decreases to $30,000. Despite the decrease, the United States Authority will charge you based on the price of the asset when you traded it rather than the current price. Hence, it is important that you consider these asset prices in the process of estimating your taxes so as to avoid confusion.

Step 3: Fill the 8949 Form

After step one and two have been passed, the next thing is to fill in the form provided by the IRS. This form is called the "8489". The function of this form is to record all the taxable crypto transactions done by an individual.

Step 4: Collate All Crypto Income

As a result of filling the 8949 form, the IRS would help in collating your crypto income. After collation, your tax return would be calculated. However, for crypto mining business, it's a little different. This is because the "1040 schedule" will be added to the 8949 form so as to differentiate between individual taxes and organizational income.

Step 5: Add Your Self-Employment Taxes

This last step is for investors who also work regular jobs. As a crypt trader and individual who also works for crypto companies, it is likely that you get paid in cryptocurrencies too. So, the IRS adds your employment income to your capital gains and takes out taxes from the combination.

The Bottom Line

In conclusion, know that cryptocurrency taxes may not be necessary if you record losses. However, this does not completely exempt you from paying taxes but the IRS can write-off the deductions from your capital gains. Despite all that, know that trading cryptocurrencies is extremely risky whether you are in the United States or not. So, as a beginner, you should familiarise yourself with the crypto regulations in the country.