Are you aware of the difference between taxable and non-taxable events? Do you know what is and isn’t subject to tax? If not, don’t worry, you’re not alone. Many people don’t understand the nuances of taxation, which can lead to costly mistakes.
You may be surprised to learn that some common happenings, like getting a raise or inheriting money, are considered taxable events. On the other hand, there are some things you might not expect to be taxable, like going on vacation or receiving gifts.
There are several tax laws that affect the way you report certain events. The IRS determines the rules for the events and transactions affecting federal income tax liability for businesses and individuals, including taxable and nontaxable income, employee withholding, and capital gains taxes. Understanding these laws is essential to ensuring that you avoid penalties.
What is a taxable event?
A taxable event is any financial transaction that generates a tax liability for the payer. A person or business’ tax liability is how much they will have to pay the government when they file their taxes.
A person’s tax liability takes into account what their taxable ordinary income is and any variables that might change that number This includes dividends, interest, and the sale of stock for a profit. It can also include the receipt of a paycheck. These taxable events are governed by Internal Revenue Service (IRS) rules.
Why tax planning is important
Taxable events can be difficult to recognize and understand. They can be costly and confusing. Thankfully, there is help.
By working with an experienced tax professional or tax-planning, you can go into the upcoming tax season prepared. By taking the time to understand the tax rules and how they apply to your specific situation, tax attorneys can help you can minimize your tax liability and maximize your savings.
Read more about the importance of tax planning.
Not all events are taxable
It’s important to understand that not all events are taxable and that certain types of events do not qualify. Generally, taxable events are payments from one person to another.
For instance, a corporation may pay an interest payment to an account holder. The account holder must report this payment to the government and report it on their tax return. Depending on how much of the interest is taxable, the taxpayer may owe taxes on it.
What is a non-taxable event?
There are many tax rules pertaining to what is a taxable event. Non-taxable events are transactions or occurrences that are not subject to taxation by the government.
This could include gifts, inheritances, child support payments, and disability benefits. In general, non-taxable events are not included in your taxable income and you will not owe any taxes on them.
However, there are some exceptions to this rule, so it’s always best to check with a tax professional to be sure. Ultimately, non-taxable events can help to reduce your tax liability and leave you with more money in your pocket. A non-taxable event is an exchange of like-kind property.
The exchange must be for business or investment purposes and the basis of the exchanged property must match the basis of the original property. The taxpayer must prove that he or she did not receive a tax in the transaction.
Cryptocurrency
With the emerging popularity of cryptocurrency since its debut in the early 2010’s, cryptocurrency has worked its way into people’s investment portfolios. Cryptocurrency is also known as a digital currency and it more formally refers to a globalized decentralized banking system.
Cryptocurrency is an open accounting system. This means that the transactions are visible to everyone. Additionally, all you need is a phone and internet connection to buy and sell cryptocurrency – this makes it accessible to most people.
How does cryptocurrency affect my taxes?
While the value of cryptocurrency can not be affected nor manipulated by any central authority and it does not rely on any third-party entities like government or banks, it can still be subject to taxes.
Previously, the IRS guidelines were very vague on the subject of digital currency, since it was still brand new. In 2019, the IRS released more detailed information regarding reporting digital currencies and any investment income associated with them.
Read about the most updated version of virtual currencies on the IRS website.
More questions about cryptocurrency?
Cryptocurrency has expanded beyond trading currency and in the last few years, we have watched it evolve into digital art (NFT) and digital real estate investing. For example, if interest has accumulated from an investment in property and not from cash holdings, you have to pay capital gains tax on the cryptocurrency tokens you receive as a reward for your staking.
If you are curious about how your cryptocurrency capital gain should be calculated or want to get ahead with tax planning to avoid any unnecessary fees or penalties, speak to a tax attorney like Joseph Damiens, today.
How to report taxable events
Taxable events are any events that result in the payment of federal taxes or state taxes. Some examples include interest payments, dividends, and selling the stock for a profit. Another example is receiving a paycheck. If you receive unemployment compensation, you will also be required to pay tax on it since it’s a form of taxable income.
Buying something on which sales tax is due is also considered a taxable event. Cryptocurrency transactions can also be considered taxable events, so you should report them on your tax return.
While not all cryptocurrency trades are taxable, you should report them if they happen to be part of your investments. Generally, they are, but not all of them. It is important to understand the definition of a taxable event before you file your return.
One-time taxable events
Some events are one-time events that last six months or less. These include festivals, farm markets, art and antique shows, car shows, and conventions. Mall kiosks also qualify as special events.
How to report non-taxable events
The key to minimizing your tax bill is to understand taxable and non-taxable events. Taxable events are transactions that impact your taxes. Understanding these events will help you minimize the amount you pay in taxes, and minimize the amount you owe.
More examples of taxable and non-taxable events
To determine your federal income tax liabilities, it’s important to understand the difference between taxable and non-taxable events. Taxable events are any time you earn money, take profits, or sell assets. They may also be accompanied by state and local taxes. Depending on your circ*mstances, you may be able to defer some or all of these taxes.
For instance, if you receive interest from a life insurance policy, the money is not taxable, but it might be taxable when you cash it in. It’s important to note that taxable events are those that require both the payer to report them on their taxes.
Talk to an experienced attorney
The bottom line is that when it comes to taxes and cryptocurrency there are still a lot of unanswered questions. But that doesn’t mean you can avoid the issue altogether. If you have any questions or concerns about the tax implications of your transactions, be sure to talk to a qualified tax attorney.
At Damiens Law, PLLC, we specialize in helping taxpayers navigate the complex world of taxation. Tax planning can help you maximize your saving and minimize your tax liability.
Contact us onlineor call (601) 957-9672 to schedule a free consultation.
