Crypto and freelancing are two trends that came up a little more than a decade ago but which have dramatically altered modern employment. Already half of the country’s population are freelancers, and it’s estimated that about 27 million people own at least one type of crypto.
But what exactly is crypto? Should you be worried about taxes if you're a freelancer using or planning to switch to crypto payments? Here’s what you need to know about taxes and cryptocurrencies as a freelancer.
The IRS treats Bitcoin, Ethereum, and any other cryptocurrency, with characteristics of a virtual currency as property. So, any tax principles applicable to general property transactions also apply to cryptocurrency transactions. In that light, freelancers getting paid in crypto are required to:
The IRS considers cryptocurrency a “property” for tax purposes, which means it is taxed the same way as stocks. Receivers are required to report any gains, losses, or crypto holdings they may have in US dollars when filing tax returns. To do this, one must first determine the fair market value of the crypto at the time of receipt and convert it to US dollars.
The IRS also treats mined crypto as income. This means crypto miners have to pay taxes on mined coins and owe taxes on the fair market value of the crypto on the day it was received.
This might prove tricky if you receive a lot of crypto payments since you may not remember the fair market value of the virtual currency at the time of each transaction. Ensure you keep track of gains and losses and the fair market value at the time of trade for an easy returns filing process when it’s IRS season.
Just as a house you sell is considered a capital asset, so are cryptocurrencies. If you sell your crypto for a profit, the IRS expects you to report either short or long-term capital gains. Generally, you report short-term capital gains when you’ve had the virtual currency for less than a year, and long-term gains when it’s more than a year.
Reporting capital gains might not be fun, but the upside is that it keeps you out of trouble with the IRS. Plus, the IRS isn’t just after your money. Just as you’re required to report capital gains, so can you write off the capital losses to reduce your tax burdens. If you buy crypto in US dollars or perform a wallet-to-wallet exchange, it’s not taxable as there are no gains.
The key takeaway is to declare crypto income, capital gains and losses when filing taxes. This will require some additional bookkeeping if you solely get paid in crypto since there are plenty of transactions to keep up with, and fair market values to remember.
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