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How do I track my cryptocurrency transactions for taxes?

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Cryptocurrencies have emerged as a powerful tool in the modern financial system. Today, there are over 10,000 different cryptocurrencies. Therefore, it is important to understand whether cryptocurrencies fit into the modern tax system. You may have questions about best practices for tracking cryptocurrency transactions and reporting cryptocurrency income for tax purposes. However, cryptocurrencies are viewed differently by governments, financial institutions, and users.

For example, the Central African Republic and El Salvador have already adopted Bitcoin as legal tender. On the contrary, critics point out that cryptocurrencies are only useful for fraud, gambling, and crime, highlighting their volatility. Regardless of the success or failure of cryptocurrencies, it is important to find a consistent approach to cryptocurrency taxation. Learn more about cryptocurrency taxation in the United States and how to track and report cryptocurrency transactions.

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Are cryptocurrencies currencies or digital assets?

At first glance, everyone would think that cryptocurrencies are just digital assets. On the other hand, you should also keep in mind that to track cryptocurrency transactions, cryptocurrencies need to be classified as currencies. If you sell cryptocurrencies for profit, the capital gains are taxable just like any other asset. Moreover, if you buy goods or services with cryptocurrencies, you will be taxed according to the VAT or sales tax applicable to cash transactions.

Before you start looking for a Bitcoin transaction tracker, you should also be aware of the most difficult problems in taxing crypto assets. Cryptocurrencies are anonymous, making it difficult to link crypto transactions to specific companies or individuals. Reporting rules for centralized exchanges can lead users to decentralized exchanges and peer-to-peer transactions without the involvement of a centralized authority.

Given these challenges, it is difficult to comprehensively integrate cryptocurrencies into the larger tax system. Therefore, policymakers need to come up with an effective, clear and consistent framework to avoid confusion regarding taxation of cryptocurrencies.

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How is cryptocurrency taxed in the United States?

Cryptocurrencies are slowly gaining mainstream adoption. As such, the United States Internal Revenue Service (IRS) has focused on taxing cryptocurrencies. Interestingly, cryptocurrencies are considered currencies, rather than property or simply digital assets, for the purposes of cryptocurrency tax enforcement.

To avoid penalties, you will need a cryptocurrency wallet transaction tracker to ensure accurate tracking and reporting of your cryptocurrency transactions. If you choose to invest in cryptocurrency assets such as non-fungible tokens and use them for other profitable transactions, you will need to prepare for cryptocurrency taxes.

It is important to remember that there are no taxes on buying cryptocurrencies or on their rise or fall in value. Taxes must be paid when you invest in, sell, or transfer cryptocurrencies for a profit. There are two common taxes levied on cryptocurrencies: capital gains tax and income tax.

Capital gains tax applies to profits made from the sale of assets purchased at a low price. When searching for the answer to “how to track cryptocurrency transactions”, you need to know that capital gains tax applies when you make a profit from the sale or trading of digital assets. If you hold the cryptocurrency or asset for less than a year, the sale or trading is considered a short-term gain. On the other hand, if you hold the asset for more than a year, you are allowed a long-term gain.

Some important situations in which you may have to pay capital gains tax include selling cryptocurrency for fiat currency, sending cryptocurrency worth more than $15,000 as a gift, etc. Once you understand that buying goods and services with cryptocurrency is also subject to capital gains tax, you will understand the need to track your cryptocurrency transactions for tax purposes.

If you exchange or trade one cryptocurrency for another asset, you will also incur capital gains tax. For example, if you buy an NFT with cryptocurrency, you will incur capital gains tax. Therefore, it is important to accurately track all your cryptocurrency transactions, as you can reduce your capital gains tax by declaring capital losses.

Income tax is also an important aspect of cryptocurrency trading. This applies to financial rewards from staking and mining tokens. With the right Bitcoin transaction tracker, you can monitor all transactions that are subject to income tax.

Firstly, you will need to pay income tax for receiving cryptocurrency through an airdrop. You should also keep in mind that if you earn interest from a DeFi lending protocol, your cryptocurrency is subject to income tax. If you receive cryptocurrency as payment for work, the transaction is subject to income tax.

  • Long-term cryptocurrency taxation

Another important thing to keep in mind before tracking your cryptocurrency transactions is the length of ownership. The IRS applies long-term cryptocurrency tax rates to cryptocurrency gains that you’ve held for more than a year. If you file your taxes as an individual, you won’t have to pay tax on gains up to $44,625. Meanwhile, married or head-of-household individuals will have to pay taxes ranging from 0% to 20% depending on their income tax bracket.

  • Cryptocurrency Taxation in the Short Term

To track your cryptocurrency transactions, you should also focus on learning about short-term gains. If you made a profit from trading or selling cryptocurrencies that you held for less than a year, you will need to pay short-term cryptocurrency tax rates. Short-term cryptocurrency tax rates vary from 10% to 37% depending on your income bracket for head of household, single filers, and married couples who choose to file jointly.

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Which cryptocurrency transactions are tax-free?

The confusion surrounding the question of “how do I track my cryptocurrency transactions” regarding taxation in the United States has led to a focus on transactions that are not subject to income or capital gains taxes. Here is a list of cryptocurrency transactions that are not taxed in the United States:

  • Retain ownership of your cryptocurrency without selling it.
  • We are developing new NFTs.
  • Transfer cryptocurrencies between your wallets.
  • Giving less than $15,000 in cryptocurrency as a gift.
  • Donating cryptocurrency to charity.
  • Buy cryptocurrency using fiat currency.

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Which platforms can help you track your cryptocurrency transactions?

You should ensure accurate tracking and reporting of all your cryptocurrency transactions and consult with a tax professional to address all your tax obligations. Some users choose to screenshot their transactions for a year instead of using a cryptocurrency wallet transaction tracker. However, you may have trouble recording your cryptocurrency transactions across all platforms. Therefore, you should choose special cryptocurrency tax software that will help you track your cryptocurrency transactions and generate accurate reports.

Some of the most popular options for such software include Accointing, Koinly, and CoinLedger. The uses of these tools are not similar to those of a Bitcoin transaction tracker and each serves a different purpose. Interestingly, all of these tools can help you track your cryptocurrency transactions. You can also take a DIY approach to tracking and reporting your cryptocurrency transactions by following these step-by-step guides:

  • Start by identifying and categorizing all your cryptocurrency transactions, including sales, trades, and purchases. You should prepare a list of the cryptocurrency type, transaction date, amount, and value at the time of the transaction. It is also important to note down important wallet addresses.
  • Determine the cost basis of every transaction, including commissions, purchase price, and other associated costs.
  • Calculate the difference between the fair market value and cost basis of your cryptocurrency to calculate your profit or loss on the transaction.
  • Depending on the duration of cryptocurrency ownership, we distinguish between short-term and long-term trading.

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How can I report cryptocurrency on my tax return?

The steps to track cryptocurrency transactions for tax purposes should follow best practices for reporting cryptocurrency on your taxes. You can use Cryptocurrency Tax Return Form 8949 to report sales and dispositions of capital assets such as cryptocurrency. This form has two parts: short-term dispositions and long-term dispositions. To report short-term transactions, you must select option C on Form 8949.

The next step is to report your cryptocurrency income on Form 1040. You can report your cryptocurrency income as a business through payments for labor, staking income, or mining income using Schedule C of Form 1040. Keep in mind that you can also report cryptocurrency income from forks, airdrops, or other sources on Schedule 1 of Form 1040.

The last word

The challenges in enforcing cryptocurrency taxation are primarily related to the anonymous nature of crypto assets. It is important to learn best practices for tracking cryptocurrency transactions, along with the capabilities of tools to track cryptocurrency transactions and taxes.

The complexity and continuous innovation of cryptocurrencies poses a challenge for regulators and policymakers in the cryptocurrency space. However, you need to understand that cryptocurrencies are also subject to taxes, such as capital gains tax and income tax. Learn more about the best tools to track your cryptocurrency transactions and make the most of your cryptocurrency taxes today.

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*Disclaimer: This article should not be construed as, and is not intended to provide, investment advice. Nothing asserted in this article constitutes investment advice and should not be construed as such. 101 Blockchains is not liable for any losses incurred by anyone who relies on this article. Please conduct your own research.

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