As the cryptocurrency market has grown in fame, more and more people are wondering whether taxes are payable for doing business by buying, selling, or exchanging these digital currencies.
The IRS, more and more, is meddling in the world of cryptos, making it greatly reduce tax evasion by people who use this business to evade taxes.
Do I have to pay taxes on my BlockFi transactions?
The amount and percentage of tax you will owe on all your cryptocurrency income will depend on your income tax bracket and how long you have held crypto assets.
In turn, these taxes can also be affected by more common cash inflows, such as employee salaries, stocks, or any other type of investment, which is not such an exact science.
How are cryptocurrency taxes levied?
Taxes for cryptocurrencies are not fixed; that is, if in a whole year you only earn $25,000, it does not mean that you will only have to pay 12% as annual income tax.
Because instead of having to pay a tax on your cryptocurrency income, you will need to pay various tax rates as it increases within the income tax brackets.
That is, you’re only going to have to pay 10% on the first $9950, AND then you’ll need to pay 12% on the next $15,050. Thus, not just a one-time tax as it is on other types of income such as wages.
But actually, it is not in all cases that you will have to pay taxes for using cryptocurrencies as a business method, as the IRS does not include all transactions.
What transactions are tax-free?
For example, you do not pay taxes for holding any cryptocurrency, i.e., if you buy Bitcoins and keep them in your wallet, you will not need to file taxes because you have not obtained any profit or loss from that transaction.
On the other hand, if you make any transaction that generates profit or loss, you will have to pay taxes for that business.
On the other hand, if you make transactions between wallets you own, you will not cause any taxable event, and your cryptocurrency will continue to exist.
Moreover, you don’t need to pay taxes if you use your cryptocurrency as collateral for a loan. Since if the debt is repaid and your assets are returned, no gain or loss will occur.
On the other hand, if, for some reason, the debt is not repaid and you lose your cryptocurrency, you would be suffering a monetary loss that would require you to report and pay taxes on it.
Can I escape cryptocurrency taxes?
The problem the U.S. government has with cryptocurrencies is that they are not traceable. For such a reason, it would be easy to divert taxes even if it is not legal.
But every time you make any transaction, platforms like BlockFi send a 1099-MISC type form that will be full of information about you and a listing of all cryptocurrency income and losses.
Therefore, if you do not report your income from digital assets and the IRS receives a 1099-misc form, you will receive letters from the U.S. government demanding that you do not evade taxes and commenting on the consequences.
As such, there have been projects implemented by the IRS in which more and more platforms have to send 1099 reports to avoid all tax frauds and penalize by law people who do not comply with their tax responsibility.
The IRS can take various serious measures if you intentionally commit tax fraud, such as sentencing you to 5 years in prison, fines up to $250,000, and criminal prosecution. At the same time, they have begun to improve their tax evasion prevention systems.
The best decision you can make is not to escape your taxes, as it is better to report them and be in good standing with the law than to spend years in jail.