Accounting for cryptocurrency in your tax return is pretty simple for most people who purchase and sell it on internet exchanges. However, like with most things linked to digital money, things may become a lot more convoluted as you become more involved.

Here’s all you need to understand about the activities you may be required to disclose to the IRS, as well as how to start planning ahead.

Buying Cryptocurrency using US Dollars

Buying virtual currency with US dollars and retaining it in the exchange or moving it to your own bitcoin wallet does not guarantee you will owe taxes on it at the end of the year.

According to IRS instructions on your Form 1040 tax return, if your sole crypto-related action this year was acquiring crypto money with US dollars, you don’t have to declare it to the IRS.

When Will You Have to Pay Cryptocurrency Taxes?

Because virtual currencies are considered property by the IRS, their taxation value is determined by capital gains or losses – in other words, how much value your assets acquired or lost over time.

When you trade bitcoins or use bitcoin to buy anything from your reliable bitcoin wallet, you’re paying capital gains taxes because you’re using a capital asset to obtain something or get another asset.

The capital gain or loss — what you’ll declare on your tax return — is the correlation between the cost you spent when you purchased or got the cryptocurrency (its cost basis) and the sum you make when you sell it. In general, if you bought $99 worth of Bitcoin and traded it for $500, you’d make a $400\1 profit. If the value of your Bitcoin dropped during that period, you’d suffer a capital loss. You can deduct up to $3,000 from your taxation if your losses exceed your gains (for individual filers).

The length of time you’ve had the cryptocurrency is also a factor. A long-term capital gain would be considered if you held onto a unit of Crypto for more than a year. It’s a short-term gain if you acquired and sold it inside a year. These distinctions may have an impact on the tax rate that is imposed. The tax rate varies depending on your total taxable income, and you may only deduct a certain amount in capital losses if your digital asset loses value.

Some people get paid in virtual money for their services. This might involve getting cryptocurrency instead of cash as a source of income, earning Crypto by mining new coins, or accepting coins or tokens as a reward for particular behaviours (like as Coinbase’s Earn rewards programme). You must measure and record of the crypto in US dollars when it is received, regardless of how it was acquired, and declare that income on your tax return.

“A taxpayer who receives virtual currency as payment for goods or services must include the fair market value of the virtual currency, measured in US dollars, as of the date the virtual currency was received, in calculating gross income,” the IRS says.