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moop12
Returning Member

I have never been employed so I never did my taxes. If I get into CryptoCurrency what constitutes as self employed and when do I list it in my taxes? like if I make $

 
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10 Replies

I have never been employed so I never did my taxes. If I get into CryptoCurrency what constitutes as self employed and when do I list it in my taxes? like if I make $

You probably don't want to report cryptocurrency mining or investment as self-employment.  While it is possible to be so heavily into mining or investing that it constitutes income earned from "work", it also makes you subject to an additional 15% self-employment tax for social security.  You can sometimes deduct investment expenses (computer purchase, home office) but those expenses are usually not significant enough to offset the self employment tax.  And if you report the income as "earned from working" to qualify for EIC, it makes you an audit target.

Normally, investment income is "unearned" (not earned by performing work or a service.)

Cryptocurrency involves two possible taxation schemes.

1. Every unit you mine, no matter which type, is taxed as ordinary income at the US$ conversion rate as of the date it is available to you to spend (credited to your wallet). (Even if you cash out in Euros or any other national currency, you report the income at the US$ value for that day.)  This is reported as miscellaneous "other income", unless you want to file a self-employed return with "mining" as a business.  (This has pluses and minuses.)

Trades between different cryptocurrencies have no tax implications.

2. Any time you convert a cryptocurrency to something "real" (US$, gold coins, other assets), you have a capital transaction that is either a capital gain or a capital loss.  The selling price is the US$ conversion value on the day you bought it and your cost basis is the purchase price or the value you paid tax on when it was created.  If you cash out for more than your basis, you have a capital gain and if you cash out for less you have a capital loss.  This is reported under "Sales of stocks and other assets."

So, unless you immediately cash out every coin you mine, you have two transactions to report -- ordinary income when the coin is created, and a capital gain or loss when it is converted to real currency or other assets.

Stock brokers issue a form 1099-B that tracks the purchase price and sales price of your stocks to make tax reporting easier.  Because cyrptocurrency exchanges are not required to do this, you need to keep really good records of all your transactions so you can determine the cost basis of the coins you convert to cash or tangible assets.  If you are audited and don't have adequate proof of your basis, the IRS can determine that the entire proceeds is a taxable gain.


moop12
Returning Member

I have never been employed so I never did my taxes. If I get into CryptoCurrency what constitutes as self employed and when do I list it in my taxes? like if I make $

I appreciate your answer so much but to be honest, it flew past my head. Its a bit too complex of an answer. So no matter how much profit I make if I sell a cryptocurrency, it doesnt mean I am considered self employed if I was unemployed prior? But at the same time, if I happen to sell my currencies and gain dollars out of it, I have to submit a specific tax paper for it even if I never did my taxes before since I fall under my parents for example? Do I have to submit every single tax file? This is just so confusing for someone very very inexperienced. Im so sorry.

I have never been employed so I never did my taxes. If I get into CryptoCurrency what constitutes as self employed and when do I list it in my taxes? like if I make $

If you have taxable income, you submit one tax return at the end of the year, that summarizes and reports all your taxable income for the year, and calculates the tax owed.  Then you either pay tax or get a refund (if your payments during the year are more than what you end up owing).

There are several kinds of income, mainly divided into "earned" and "unearned."  Earned income is income earned from working -- performing a service in exchange for money or other things of value.  "Unearned" income is not undeserved -- it is a technical term meaning anything that does not come from what the IRS calls "work", and can include things like investment income, dividends, income from renting property, gambling and other prizes, and so on.

"Self-employed" means you are performing work or a service in exchange for something of value.  Usually money, but you can also be paid in stock options or anything else of value.  When you "work" and have "earned income" you are eligible for certain tax benefits that are reserved for having earned income (not available if all your income is unearned) but if you earn money from work you also have to pay medicare tax and social security tax.  That's an extra 15% tax on top of your regular income tax.  When you are self-employed, you report your gross income and can deduct expenses that you paid to make that money -- a maid can deduct cleaning supplies; a freelance writer can deduct paper and ink; a building contractor can deduct materials, tools, and gas for their work truck.  Your net profit is subject to both income tax and self-employment tax.  A self-employed tax return will include a schedule C that reports the work income and expenses and calculates the net profit.

For cryptocurrency mining, if you report it as your "work" on schedule C, you will pay both income tax and self employment tax.  Your expenses (computers and electricity) are going to be difficult to prove for various reasons, so the expense deduction probably won't offset the extra tax.

So instead you would report your cryptocurrency income as "other income" -- similar to how you would report a lottery prize.  The amount of income is equal to the value of each coin or part of a coin that you are awarded on the date it is awarded.  For example, if you are part of a pool and are awarded 0.1 BTC once a month, you would count that as income using the exchange rate on the day it is awarded (around $1500 today).  You keep a list of all the coins that are credited to your wallet, the date, and the exchange value on the day it is awarded.  At the end of the year, you report the total dollar amount as income.

Separately, if you hold the currency and sell it later, you have to account for a gain or loss.  This is similar to buying and selling gold coins or other collectibles.  You have a capital gain if you sell for more than you paid, and you have a capital loss if you sell for less than you paid.  That creates more taxable income, or a tax deduction.  Suppose you create 0.1BTC on January 10 for $1500 and report that as taxable income.  Then you sell it on June 30 for $1800.  You have a $300 gain that is a second type of taxable income.  Or if you sold it for $1200, then you have a $300 loss that you can use as a deduction later.  You also need to keep accurate excellent records of each time you cash out a virtual currency, including the date and amount of the cash out and the date and amount you paid for the coin, or the date and amount of income that you reported when the coin was created.

If this is still too much for you, I suggest you find a high school, community college, or other organization that offers a free or low cost course in income taxes.  The IRS has 7 years to audit you if you fail to report income and it is not clear how much information the IRS will be able to get from the cryptocurrency exchanges about their customers.  You can also read the IRS web site or buy a book on the topic, there are several inexpensive books on income taxes and cryptocurrency taxes for beginners.
moop12
Returning Member

I have never been employed so I never did my taxes. If I get into CryptoCurrency what constitutes as self employed and when do I list it in my taxes? like if I make $

Im so sorry Opus, I feel so bad because you put in so much work in trying to explain this to me but I end up being more confused in the end. If I do get into crypto im a total beginner so I dont think mining applies to me. I would just buy a currency and maybe try and sell it for a profit. So if I never had a job and im dependent on my parents. If I do buy and sell the currency and make a profit, you said regardless I have to file my own taxes from then on, even if i make like 500 dollars max? Where would I even put this information depending on whether it would be the first of filing my own taxes or my parents putting this on their taxes? So sorry Opus.

I have never been employed so I never did my taxes. If I get into CryptoCurrency what constitutes as self employed and when do I list it in my taxes? like if I make $

If you are under age 18, there are some circumstances where a limited amount of investment income can be reported on a parent's return instead of a return in your name.  This is called the "kiddie tax" and is fairly complicated so I'm not going to go into it.  If you have investment income and want to discuss this, you and your parents should consult a tax advisor.

Sometimes the kiddie tax is not an option, and even when it is, a person always has the option of reporting investment income in their own name, so I will stick with that for now.

Any time you sell anything for more than you paid for it, you have taxable income.  That's a general rule.  This applies to eBay, garage sales, stocks, comic books and other collectibles, and virtual currency.  It's considered investment income, or "unearned" income.  If the asset was held more than one year, it is considered a "capital asset", so the income from selling it is considered "capital gains."

You have to keep accurate records of the items you sell, so you can prove if audited, what the original price was and the amount of taxable income or loss.  (There is a recent tax court case involving a person who made $25,000 of gross sales on eBay in one year. She claimed everything she sold was sold for less than she paid for it, so she had no taxable profit.  The tax court doubted that she was really only selling used personal items for less than she paid, and because she kept no records and had no proof of the items she sold, the tax court ruled that all her gross proceeds were taxable income, and assessed tax, interest, and a penalty for preparing a deliberately inaccurate tax return.)

As applied to virtual currency, buying the currency is treated as an investment. You buy some number of units of bitcoin, ethereum, etc. with US dollars.  This by itself does not affect your taxes or need to file a tax return.

When you sell, you have a gain if you sell for more than you paid, and you have a loss if you sell for less than you paid.  Gains are taxable income and losses are deductible and can offset other gains.  How the gain is taxed depends on how long you held the asset before you sold it (one year or less; or more than one year.)

So you need to keep track of each unit you buy, with the date and price, and keep track of each unit sold, with the date and price, so you can calculate your gain or loss.

As long as you are a dependent of your parents, you must file a tax return if your investment profits in any tax year are more than $1050, or your total income from investments plus working is more than $6350.  If you are not a dependent of your parents, you must file a tax return if your total income is more than $10,400.
moop12
Returning Member

I have never been employed so I never did my taxes. If I get into CryptoCurrency what constitutes as self employed and when do I list it in my taxes? like if I make $

Thank you so much! I am beginning to understand much better now. Alright, what if it is the case that you happen to buy and sell the currency far less then $1050, and you are dependent on your parents? So in this case it will include investment profits plus parents income which means I still have to add it to my parents taxes since with the working income is more than 6k? Where will this go in their taxes? In the stock/currency section?

I have never been employed so I never did my taxes. If I get into CryptoCurrency what constitutes as self employed and when do I list it in my taxes? like if I make $

If your investment profits are less than $1050 you don't have to report them anywhere.
moop12
Returning Member

I have never been employed so I never did my taxes. If I get into CryptoCurrency what constitutes as self employed and when do I list it in my taxes? like if I make $

oh so regardless whether you are dependent or independent, if you have a job or not, if your investment profits are less than 1050, then you dont have to file taxes for it?

I have never been employed so I never did my taxes. If I get into CryptoCurrency what constitutes as self employed and when do I list it in my taxes? like if I make $

Not quite.  If your *only* income is from investments, you don't have to file a tax return or pay tax if the amount is less than $1050.

If you have a job and are required to report the income from your job, then you must report *all* your income on your tax return.  Usually, that means if you earn more than $6300 when you are a dependent, or if you earn more than $10,300 if you are not a dependent.
moop12
Returning Member

I have never been employed so I never did my taxes. If I get into CryptoCurrency what constitutes as self employed and when do I list it in my taxes? like if I make $

oh I see now, thank you very much for continuing to help me understand. Much appreciated.
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