Cryptocurrencies slowly gained popularity over the past few years. Some cryptos, like Bitcoin, have drastically risen in value over time. Though digital currencies have been with us for years, there are still a number of gray areas where potential investors seek clarity.
One of these is the taxes that apply to cryptocurrency transactions. Are there any taxes that apply, and if so, how are they calculated?
Coinbase is one of the most popular cryptocurrency exchanges used by digital currency users today. They don’t levy any taxes but do have their own fees and commissions. They can help you work out your cryptocurrency taxes by providing you with your transaction history as well as some pointers as to what the IRS expects for different kinds of crypt dealings.
What is Coinbase?
Founded in 2012, Coinbase is now recognized as the most popular mainstream cryptocurrency exchange in the United States. Most newcomers into the virtual currency space perform their first transactions on this platform. Coinbase users can buy and sell Bitcoin units as well as most of the other popular cryptocurrencies on the market.
One of the reasons behind Coinbase’s popularity is its easy-to-use trading platform. You can sign up and begin trading in a matter of minutes. They also have a learning program that rewards you as you increase your crypto know-how.
Another reason is the sheer number of altcoin options Coinbase offers. You’re not restricted to Bitcoin; you can trade Litecoin, Bitcoin Cash, Ethereum, and up to 25 other currencies. However, seasoned crypto traders might find Coinbase’s altcoin selection rather limited.
The fact that Coinbase is one of the more liquid exchanges out there gives investors a degree of security that there is a buffer against the well-documented volatility of the crypto market. On the flipside, Coinbase’s entry-level fees are among the highest in the industry. You can mitigate this by moving to Coinbase Pro, but the wealth of features can be intimidating if you’re a beginner.
Various taxes apply to cryptocurrency transactions depending on how you use crypto to generate wealth. An Internal Revenue Service (IRS) notice issued in 2014 declared that while cryptocurrency does hold value, virtual currencies will be treated as property for federal tax.
In this vein, if you sell cryptocurrency at a higher price than you bought it, this event will be considered a capital gain for which capital gains tax is due. If you sold goods or a service and were paid in cryptocurrency, the IRS will expect you to include the virtual currency’s fair market value in your gross income. The same goes for those involved in cryptocurrency mining who are paid for their services in crypto.
The key to your cryptocurrency tax computations and filing is record keeping. Your records need to indicate the fair market value of whichever digital currency you were using when you mined, bought, or sold it.
Ignorance is no defense when it comes to taxes, and cryptocurrency taxes are no exception. Just because Coinbase did not issue you with a Form 1099-B like you get when you buy stocks, doesn’t mean your transaction is not taxable. Failure to record your transactions and file your cryptocurrency tax returns will leave you liable to the IRS’s punitive measures.
In light of the IRS’s stance on crypto, the following events are considered taxable:
- Receiving any mined cryptocurrency
- Receiving your salary or wages in cryptocurrency
- Interest earnings or staking rewards paid in crypto
- Buying units of a cryptocurrency using another digital currency
- Paying for goods or services in crypto
- Selling your crypto for a higher price than you bought it.
However, if you’re moving crypto between wallets or from an account with another exchange to Coinbase, this is not a taxable event. You also won’t be liable if you make a charitable donation in crypto.
There are forms the IRS expects you to fill to give details of your crypto transactions come tax season. The Form 1040 will give a summary of your capital gains or losses, while the Form 8949 will give details of these transactions. If you’ve earned more than $600 a year from speculation, you will be expected to report this in the Form 1099-MISC.
Hire a Tax Professional
Keeping an up-to-date record of your cryptocurrency transactions is essential, but you may not have the time to do it. You also may not have the expertise to sniff out intricate technicalities that may help you pay less taxes or avoid penalties.
It will therefore be to your benefit to call in a qualified tax professional. Certified tax professionals know the best practices for Coinbase taxes and will help you make the most out of your crypto activity. They take away the stress associated with tax preparation.
Regardless of how much you know about cryptocurrency, the rules are always changing. Be sure to stay informed so you don’t find yourself in the midst of a volatile market. Follow best practices and get professional help to make the process enjoyable.