Guide to paying taxes on cryptocurrency income

Many misunderstand crypto, thinking its anonymity hides them from the IRS. In reality, crypto income is taxable. Here’s a guide on how to pay in 2024.

A lot of people still have misconceptions about the way cryptocurrency works. They’ve heard that cryptos provide anonymity, which makes them develop a false assumption that not even the IRS will be able to track the amount of cryptocurrency income they receive.

This, however, is false. 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. 

Understand taxable events

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

Trading cryptocurrency

Selling one cryptocurrency and buying another is taxable. This is important because there are new promising cryptocurrencies every day, and keeping track of this is often far from easy. According to crypto 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 trade, they have to report the fair market value of the cryptocurrency received. This is a huge obligation that a lot of crypto traders neglect. 

Purchasing goods and services

Cryptocurrencies can be used to buy goods or pay for services. In the majority of countries, states, and jurisdictions, this is susceptible to taxation; however, it’s a lot harder to determine this tax when it’s crypto that we’re talking about. 

The bottom line is that the customer has the exact time of the transaction, and during the reporting process, they have to report the fair market value of the cryptocurrency that was used in the transaction. To some, this may seem as simple as just stating the price in their fiat currency, but it often ends up being slightly more complex.

Selling cryptocurrency

Every time cryptocurrency is sold for fiat currency (like USD or EUR), this is considered a taxable event. In this event, capital gains and capital losses have to be reported. Now, this is basically just a more standard form of the taxable event we’ve described when we talked about trading cryptocurrencies.

The bottom line is that this is, more or less, always the end goal when crypto trading. Crypto adoptions are still not as great as someone will be able to use it for all your acquisitions. In other words, eventually, trading them for fiat is what people are looking for. Keep this in mind before doing so. 

Mining cryptocurrency

Mining cryptocurrency is expensive as it is. Someone has to buy the equipment, invest in adequate software licenses, set it all up, and pay an enormous electricity bill. In today’s climate, it’s questionable what kind of returns you’ll have. 

Now, the last thing someone wants is to calculate all of these expenses and figure out that they’ll be able to break even (or even profit)… because they’ve forgotten that they also have taxes to pay. Mining rewards are an income, and they have to be reported as such. 

Crypto gained through luck-based games

If cryptocurrencies are earned by playing luck-based games on online casinos, even if they are anonymous casinos, winnings have to be reported. Casino winnings, lottery winnings, sports betting, raffle prizes, and sweepstakes all have to be reported. 

Underreporting or misreporting income (even this form of income) is a serious problem for anyone, and it could land someone in a huge deal of legal trouble. Therefore, this mistake should be avoided. 

Calculating gains and losses

Once all the taxable events are identified, it’s time to put all income and expenses/costs on paper. To begin with, any taxable income has to be checked. Just because some value is exchanging hands, this doesn’t mean that someone is better off than before. So, there are a few things that need to be taken into consideration. 

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

Next, the so-called fair market value has to be provided. This is the cost of cryptocurrency at the time of acquisition (at the time of the taxable event mentioned in the last section). 

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

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

Federal vs. local taxation of cryptocurrencies

When it comes to the federal income tax, the IRS considers crypto assets to be similar to property. This means that they’re subject to capital gains tax rules. 

State taxation varies by state. For instance, there are income-tax states and no-income-tax states, but there are also specific state regulations, which means that the state in question may offer tax incentives related to cryptocurrency. One example is Wyoming, which is quite proactive in creating a favorable regulatory environment for crypto businesses and users. 

As more and more merchants accept crypto assets as payments, the question of state and local taxation of these resources becomes an even more important issue than before. The importance and adoption of cryptoassets are bound to increase further in the future, which is why understanding the regulations surrounding it become such a high priority for everyone. 

Importance of reporting and keeping detailed records

Knowing how much has to be paid and just paying is merely one in a long series of necessary tasks to complete in order to settle obligations toward the IRS.

When it comes to reporting income from crypto activities, the right forms like 1040, 8949, and Schedule D are to be used. It all depends on whether money was made from mining, staking, or selling and trading. 

Most importantly, all the detailed records have to be kept. A detailed transaction history with all receipts and statements and wallet addresses (of wallets involved in your transactions) have to be kept. 

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

Crypto income is taxable; evading taxes can lead to serious trouble

It is 2024, and cryptocurrencies are no longer unregulated. They’re also no longer small and insignificant enough that they fly under the radar of the IRS. Settle all responsibilities toward the IRS. All the resources on the subject matter are available, which is why the idea that someone doesn’t know how to do this no longer holds up.