Cryptocurrency is treated as property by the IRS, meaning that transactions, including trades and sales, are subject to capital gains tax.
This is distinct from traditional currency transactions, where gains or losses can be simpler to report.
You must report every transaction involving cryptocurrencies, including purchases made with crypto, which can complicate your tax return compared to reporting gains from just stock sales.
FreeTaxUSA allows you to report your cryptocurrency earnings by entering your total capital gains from crypto sales.
Therefore, it's critical to keep detailed records of your transactions.
If you engage in staking or mining cryptocurrencies, these can also be considered taxable events, generating income that needs to be reported on your tax return even if you didn't sell a coin.
The concept of "like-kind exchanges" which used to allow deferral of capital gains taxes for property trades does not apply to cryptocurrency under current IRS regulations.
If you hold cryptocurrency for over a year before selling, you may qualify for long-term capital gains rates, which can be significantly lower than short-term rates.
Accurate reporting of your crypto earnings is crucial because the IRS is increasing its enforcement and may audit taxpayers who do not report cryptocurrency income.
To use FreeTaxUSA for cryptocurrency, it is essential to summarize your earnings on a Form 8949, where each transaction is documented for capital gains and losses.
Some third-party tools can help track and aggregate crypto transactions, which simplifies reporting on FreeTaxUSA, allowing you to import your totals more easily.
The IRS requires taxpayers to indicate on their 1040 if they engaged in any virtual currency transactions, which puts an extra emphasis on transparency in reporting income.
Tax loss harvesting is a strategy where you can offset capital gains with capital losses.
This applies to cryptocurrencies as well, allowing you to potentially reduce your overall tax burden.
The ongoing evolution of regulations regarding cryptocurrency taxation means that what is true this year may change, making it critical for taxpayers to stay informed about current laws.
If you receive payments in cryptocurrency for goods or services, these are considered income and must be reported based on the fair market value at the time of receipt.
A feature within FreeTaxUSA allows you to enter your total crypto-related taxable income, which makes it easier if you have multiple sources of crypto earnings.
Losses from cryptocurrency transactions can offset gains, and if your total losses exceed your gains, you can typically deduct up to $3,000 against other forms of income.
Maintaining a detailed log of each cryptocurrency transaction, including the date, amount, currency type, and transaction purpose, ensures compliance and simplifies reporting on FreeTaxUSA.
If you gift cryptocurrency, different tax rules apply.
The recipient may need to report gains upon selling the asset, and you need to keep track of the market value at the time of the gift.
Given the volatility of cryptocurrencies, the realized gain or loss can fluctuate significantly even within a short period, complicating the reporting process if not tracked diligently.
Tax software like FreeTaxUSA does not automatically calculate basis for every crypto transaction, so understanding how to calculate it correctly is essential for accurate reporting.
Lastly, the taxation landscape for cryptocurrencies is quickly changing, with ongoing legislative discussions that might introduce new rules or redefine existing ones, requiring taxpayers to stay alert for updates.