Up next in 10
Cryptocurrency and Taxes: How to Report Crypto on Your Tax Return | Tax Info from IRS.com
88K views
Mar 19, 2024
Virtual currency has sparked a lot of controversy lately, especially regarding scandals between cryptocurrency and taxes. But you can avoid problems with the IRS by reporting you crypto and virtual currency gains or losses correctly! This video will cover what crypto is, how to report it on your tax returns, and what records you should maintain for your virtual currency transactions. ------------------------------------- Tax Advice for Real People We provide practical easy to understand tax advice, prepared by leading tax experts in the USA. ------------------------------------- Resources https://www.irs.com/en/virtual-currency-taxes-faqs/ ------------------------------------- Contents of this Video: 00:00 Intro 01:18 What is crypto? 04:26 When to tell the IRS you bought crypto? 05:55 How is crypto taxed?
View Video Transcript
0:00
With all of the recent news, especially with FTX, you can see that the IRS is not particularly happy with them
0:09
And that's a Bitcoin exchange which is dealing with crypto. But how does it apply to you
0:14
How does it apply to you as an individual? So let's get into a little bit of like what crypto is to kind of explain it
0:23
Because sometimes people put themselves into a situation where they have crypto, but they might not know that much about it or how it works
0:33
So let's get into it. You may have something like Ethereum. You might have something like Bitcoin or Monero
0:41
Or a bunch of other coins that are currently available on the market that still use a very similar technology
0:49
But when you're thinking about all these things, you might not be thinking about taxes
0:54
And that's going to become really important here in April. But, you know, crypto, like all other assets or currencies, is monitored
1:06
And so during this video, we're going to cover all the frequently asked questions to understand how the IRS treats virtual currencies or other types of cryptocurrencies
1:18
According to the IRS, crypto is a virtual currency, but it's a currency that is not backed by the IMF or the International Monetary Fund or backed by the United States government
1:32
However, it does function as a unit of account or a store of value or something that we believe has value that you can exchange for either goods or services
1:44
Now, this type of virtual currency can be converted to a natural form of currency such as USD, CAD or any other type of currency
1:56
However, all that may be monitored by the government. So when we talk about crypto and what is a virtual currency, what does that mean? Is it just like your bank account
2:08
It's similar to your bank account, but not exactly. It actually uses cryptography to secure transactions digitally on a distributed ledger
2:19
So that was a ton of big words. And you might hear like, oh, it's all stored on the blockchain
2:25
That explains a little bit of it. But I think the easiest way to understand it is like a giant Excel spreadsheet
2:32
And that Excel spreadsheet records every transaction. Hey, Joe just mowed my lawn
2:39
I'm going to give him $20. But whenever you hand Joe those $20, it's recorded on an Excel spreadsheet that everyone using that currency can see and monitor
2:53
So it's a way for people to have distributed systems of money that they can all trust over a digital medium
3:02
Everything is now recorded for everyone else to see. But is it real money
3:08
It's just somewhere on a database, right? I mean, it's exchanged amongst many users
3:14
But in order to have your name on that database, you must first use a currency that is backed by a government such as USD, CAD, or many other things
3:26
And often this exchange is facilitated through Binance or many exchanges like the former FTX, in which users can exchange their actual United States dollars or any exchange from the government in order to buy this virtual currency
3:48
This currency is then put on the distributed ledger. Now, when it's on the ledger, individuals can either trade this currency so they can buy goods and service such as someone mowing your lawn or buying a pizza or something to that effect
4:05
Or they can sit on this money and speculate that other people might use their government backed currency to invest more in it in which the value would increase
4:19
And it would also provide more liquidity to these unregulated markets. So, how do taxes come into this entire equation
4:31
If you've bought crypto from one of these exchanges like Binance, Coinbase, or the former FTX, you would fill out the form 1040 for your individual tax form, in which it will ask you if you've bought, received, sold, sent, or exchanged any financial interest in this virtual or sometimes tied to real currency during the current tax year
5:00
If you've purchased cryptocurrency with a government backed currency like USD, but had no transactions, you are not required to answer yes to the form 1040 question
5:14
No transactions after purchase means that you do not owe any taxes
5:20
This is really similar to purchasing a stock on the NASDAQ or the Dow Jones
5:27
It's similar in a way because it can be treated as an investment. So, if you don't plan on exchanging it for any goods and services, but plan on holding onto it, then you will not have to provide any taxes until you make a transaction
5:42
And any of those transactions, such as if you buy Bitcoin and then you transfer Bitcoin back into USD, you will have to pay taxes on that because that does count as a transaction
5:55
So, crypto can be considered like general property within taxes. It can be like stocks, it can be like gold
6:05
All of this also still applies to crypto. Buying crypto doesn't mean you'll be taxed, but if you sell or divest, you may be subject to taxes at that time
6:20
So, if you use anything like a method of exchange to buy things, maybe you have this Bitcoin and someone tells you that you can buy Ethereum for a much better price, you may be subject to taxes on exchanging your Bitcoin to Ethereum
6:39
There's also the subject is if you get crypto as an income, which can also be taxable, but it's taxable in a very different way
6:51
And now that we've kind of talked about crypto in the abstract and what kind of taxes are applicable to crypto, let's get a little bit less abstract here
7:02
Let's go into a few examples. So, perhaps you're exchanging crypto for USD like we talked about earlier
7:10
That's taxable. Using crypto to pay for goods and services like buying a pizza
7:16
That's taxable. Exchanging crypto for another virtual currency. Also, like we talked about earlier, if you're going from Bitcoin to Ethereum or Bitcoin to Monero or Ethereum to Monero, it doesn't matter the cryptocurrency
7:31
It is still taxable when a transaction is made. You could also be getting paid in crypto for goods and services, such as the pizza delivery driver or crypto mining, which is also taxable
7:48
You can also even get taxed if someone randomly sends you some cryptocurrency
7:55
That is also subject to taxing. One of the more interesting things is you can even get taxed on staking cryptocurrency, especially if you earn interest off of staking it and providing more liquidity to the pool
8:12
Crypto tax rates really depend on a multitude of factors. Not only does it apply to your current tax bracket, but it also depends on whether you are buying it or receiving it
8:26
This might be also known as capital gains tax and income tax
8:32
Capital gains tax applies when you use crypto as an investment either intentionally or unintentionally
8:39
When you sell crypto, you're going to have to pay capital gains tax on it if it has increased in value during that time since which you bought it and which you sell it
8:52
Now, there can be either a capital gain or a capital loss, such as when you have a stock within the market
9:01
If the stock you bought has had a capital gain or a gain in value since you bought it, you may be subject to taxes for how much revenue you have earned for that stock
9:15
It also applies to crypto. You may also report some losses on those coins of which you bought and perhaps have lost money
9:29
However, there are two different types of capital gains, especially how you're taxed, and it mostly delves into how long you've held your crypto
9:42
So if you've held your crypto for less than a year and you decide to make a transaction, whether for goods, services, or you sell it trying to make a profit, you will probably be taxed at a rate of from 10% to 30% or 37% of your profits
10:01
This also kind of varies based on tax bracket and your filing status
10:08
Now, if you've held your crypto for longer than a year before you made another transaction, then your tax will be a lot less, which ranges all the way from 0% to 10% based on how much profit you have made during that time
10:28
This also still comes with the caveat that it varies on your income tax bracket and also your filing status
10:38
So, how do we calculate capital gains and losses? First, you need to know your cost basis of your crypto, what the fair market value is in USD, which is going to become important to the IRS and the government
10:56
So, this only applies when you first buy it. Your gains and your losses
11:02
This is the difference between the cost basis of when you bought it and the amount you received after the transaction
11:10
All of this needs to be reported in USD on your federal income taxes
11:18
Let's say for example, you are a non-dependent single person who bought $1,000 worth of crypto a few years back
11:27
You kind of forgot about it, you were checking on it for a few months, it wasn't doing that well, but this year it's exploded
11:35
The market value is worth $20k. You've made a 2,000% increase in your initial investment
11:42
That's insane. But if we go from the market value of your $20k to where you profit or your revenue to the $1k of where you bought it
11:54
If we subtract the $20k from your $1k that you initially bought it at, then you've made $19k in profits or in this case, capital gain
12:07
In this case, since the non-dependent single person had it for several years before they sold it, they would fall into the second bracket of long-term capital gains tax rates
12:21
So, let's get a little bit more granular here. So say you bought 14 Bitcoin, a cryptocurrency, in 2011 at $10 each
12:34
So if you bought 14, that would mean it would be about $140 USD
12:39
But you used it to buy pizza for a bunch of friends. Had you not disposed of crypto at that time, the current Bitcoin market value is about $238,000 that you had originally purchased on those 14 Bitcoins
12:56
That would be the total. So, let's calculate a little bit of the taxes you owe
13:03
So we would take $238,000 and we would subtract it by $140
13:10
That would mean that you have now gained in capital gains $237,860
13:19
Because you've had this crypto for several years though, that would mean that you are now falling into the long-term capital gains tax rate
13:28
Because of the amount of capital gains from this investment falls into the tax bracket of 15%
13:34
we mean that when this person divests or they make a transaction, then they will have to pay the IRS $35,679
13:46
So how do you report these crypto capital gains? Well, it takes a lot of recording first
13:55
First you have to record your transaction of when you bought and when you sold. You must also calculate your capital gains and your losses in accordance with the IRS forms and instructions included on the form 8949
14:08
also known as Sales and Other Dispositions of Capital Assets. Then you must summarize your capital gains and deductible capital losses on the form 1040, Schedule D, Capital Gains and Losses
14:24
Okay, you know how this crypto stuff works now. But you're a little bit smarter than the average bear
14:32
You know that you can make some income off of crypto. So how is that taxable
14:38
If someone pays you for goods and services using crypto, how do we deal with that
14:43
Well, when filing taxes, you need to report the market value of the crypto at the time that you received it
14:50
And this is always going to be based on the United States dollar for the IRS
14:58
And maybe you don't get your income off of doing goods and services, but instead crypto mining, a different form of goods and services
15:09
Crypto mining is an interesting term which refers to utilizing computers to perform pretty complex algorithms to verify transactions
15:20
and make sure that the money is placed within the ledger that we talked about earlier
15:25
You know, the really big Excel spreadsheet accurately. Whenever someone places it correctly, they actually receive profits from that providing an income
15:37
Miners are compensated this way to make sure that every transaction is never misstepped and does not have an error within it
15:47
Let's talk about how crypto mining is actually taxed. Now, it can be different depending on your circumstance. Are you using it as a hobby or as a business
15:58
We can discuss both. However, you might learn that your hobby is actually kind of a business
16:06
So let's go into some of the details. If you're running a crypto mining business, you'll need to file the form 1099-NEC to disclose self-employed income
16:20
If you file as a business, you can deduct expenses such as space, equipment, electricity, such as kilowatt per hour
16:27
You can also deduct such things as GPU expenses, how much other types of capital that you would have to buy
16:36
That will be considered a crypto business. If you get a positive taxable income where your revenue is greater than your expenses
16:48
you will be taxed over the time period of 3-5 years. If you do not fall into that purview, it will be your hobby
16:58
If mining is a hobby, if you've either fallen less into that so you've gained more revenue under 3 years
17:05
or if you've paid more expenses in the 3-5 years that you've been doing it, then it is your hobby
17:13
You will have to report it on line 8 of your form 1040
17:18
Even if you receive crypto from something like staking or even someone just sends you crypto
17:26
such as if you buy an NFT, then you will have to file that on line 8 of your 1040
17:34
That is still a taxable income where you will need to report it
17:40
Now, what happens if you don't go through any of these steps
17:44
Oh my gosh, it's such a headache. Why do I have to report it? It's all anonymous, right
17:51
Why does the government need to know about what I'm doing? It's a headache
17:55
But, if you don't file, and if you fail to report your crypto on your taxable income
18:02
and then you get audited, it can get brutal. It can get ugly
18:06
Many people believe that crypto is anonymous. However, this belief is false
18:12
Criminals have been taken down. The recent scandal with FTX proves that all this stuff is out in the open
18:20
Just as we talked earlier, it's all part of a public ledger
18:24
And beyond that, you don't want to be like Wesley Snipes, who faced 3 years in prison because of tax evasion
18:35
And if you don't report your cryptocurrency, you could face penalties of criminal charges of perjury
18:41
of lying under oath, of tax evasion, or fraud. In more recent examples, even Sam Beckman Freed
18:50
the former owner of FTX, was investigated for some of his crypto charges and transactions
18:59
that were unlawful and not reported to the IRS. And he is currently facing criminal charges
19:08
So how do we not end up like Sam Beckman Freed? How do we make sure that we're reporting accurately and truthfully
19:18
and make sure we don't get locked up into a prison somewhere that's horrible
19:23
We need to do records. The IRS has codes and regulations on how you maintain those records sufficiently
19:34
and verify when they come to audit you, which I hope they don't because you're utilizing our services
19:43
But, just in case, for each of our individual safety, we need to keep the following records for crypto
19:52
whether digital or through paper. You need to keep receipts, such as if you buy it at a local Bitcoin ATM
20:02
Sales, when you make a transaction and you give it to another wallet or another claim
20:10
Whether you give your money to exchanges, such as USD or any other currency that you would give to an exchange
20:18
Keep a record of the date and time that the transaction has gone through
20:24
because that might be very important to your records later. You will also need to keep a record of your disposals
20:32
Those disposals can be exchanges, going back to USD, going to Monero, going to Bitcoin
20:42
going to the former TeraCoin, or even Dogecoin. Whatever type of coin, it's important to keep the records of the time you exchanged
20:53
either on a USB or on paper that you can give to the IRS so that they might be able to track those transactions
21:05
So, what have we talked about today? What is cryptocurrency, according to the IRS
21:10
It is a virtual currency and it applies to both capital gains tax and income tax
21:17
depending on how you're utilizing the currency. Should you tell the IRS about if you bought cryptocurrency? Absolutely
21:27
And it can be tracked because we all remember that it's on a public ledger that everyone can see
21:34
including the government, including you. How is crypto taxed? It's taxed in multiple ways, through capital gains and income
21:42
How to calculate capital gains and losses? That you should take your net profits and submit them to the IRS
21:52
What happens if you don't report cryptocurrency on taxes? You can be fined heavily or it could result in prison time
22:01
What records do you need to maintain for virtual currency and transactions
22:07
You need to remain date and time, current USD value for that currency
22:13
and perhaps where you sent the wallet to. I hope this helped you in how to navigate cryptocurrency and also taxes
22:23
It can get really confusing, but finances are a very important part of your life
22:29
Thank you. Thank you
#Currencies & Foreign Exchange
#Financial Planning & Management
#Tax Preparation & Planning