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Taxes and Cryptocurrencies: The Ultimate Guide

The way you utilize cryptocurrency determines how it's taxed.

Cryptocurrencies have become a common part of our vernacular these days, so it shouldn’t come as a surprise that there is IRS guidance on their taxability.

The IRS put guidance out in 2019 stating that cryptocurrency is taxable, so make sure you include them on your 2020 tax returns. So it's important to keep track of your digital currency trades, your income, and the people you pay using this stuff. Because it is all reportable to Uncle Sam.

But, it's important to know that how you use cryptocurrency determines how it is taxed, according to CPA and TurboTax  (INTU) - Get Intuit Inc. Report expert Lisa Greene-Lewis.

A cryptocurrency is a digital currency that can be used to buy goods and services and is basically taxed in three different ways: When you pay someone or get paid in crypto, when you trade cryptos, or when you mine crypto. 

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If you hold it as a capital investment and then sell it, it would be taxed as a capital gain or loss just as if you sold stock. If you're paid in crypto on your W-2, it will be considered taxable income. If you're paid in bitcoin or digital currency as a contractor, it will be reported on your 1099-MISC form. And if you mine cryptocurrency, you are technically self-employed and it would be considered self-employment income. 

If you make any purchases in bitcoin, you will recognize that gain or loss based on the fair market value of what you are receiving. For example, if you buy a Tesla  (TSLA) - Get Tesla Inc. Report worth $42,000 with bitcoin but you purchased that bitcoin for $6,000, you will be recognizing a gain on the difference.

The IRS added a new box to check on form 1040 asking whether or not you had virtual currency transactions. 

And if you actively trade cryptocurrency daily, platforms like TurboTax allow you to upload up to 1,150 stock transactions at once, and you can upload up to 2,250 cryptocurrencies at once to help keep track and account for everything you traded, bought, or sold in 2020.