Tax season rarely ranks as a favorite time of year for most people. Even if you anticipate receiving a refund, the tax preparation process can still be stressful and confusing. This is particularly true when having to account for cryptocurrency activity. Although this year marks a decade since this digital currency was introduced to the world, there is still confusion as to how it affects taxes. Here’s what you need to know. 

Understanding Your Cryptocurrency Tax Obligations 

1. Cryptocurrency Is Classified as Property 

In the eyes of the government, cryptocurrency is viewed as property rather than money. As such, the IRS requires that it be reported as short-term or long-term capital gains or losses. Short-term gains occur if you sell digital currency you’ve held less than a year, and they’re taxed at the same rate as normal income. On the other hand, long-term gains apply to property you’ve held for more than a year, and they have a reduced tax rate. 

2. Investors Must Usually Submit Two Tax Forms 

To report your cryptocurrency gains and losses, you will need to fill out Form 8949 with the date of your digital currency purchase, what you paid for it, the date you sold it, the profit you made, and any associated transaction fees. The details from this form may then need to be used to fill out Form 1040 Schedule D, which specifies your total short-term and long-term gains and losses. 

3. Investors Are Responsible for Their Own Reporting 

As an investor, you must include digital currency on your taxes if you’ve sold or traded it to buy something. The IRS doesn’t tax cryptocurrency holdings that have simply increased in value. Some crypto exchanges may issue forms that have all the information necessary to prepare your tax return, but even if they don’t, you are responsible for reporting your activity. Therefore, it’s essential to keep organized records of your transactions to avoid scrambling to find them at the last minute. 

Making even the slightest mistake on your tax return can have costly consequences. Gain peace of mind knowing that your filing accurately by working with the professionals at ZP Tax. They have expert knowledge of the tax code and will ensure you’ve properly met your cryptocurrency tax obligations. Over the years, countless residents throughout Montgomery County, MD, have relied on their expertise for high-quality and efficient tax preparation. Call (301) 587-4829 to schedule an appointment.