Wednesday, June 29, 2022

Do I Have To File Taxes For Cryptocurrency

What Crypto Activity Is Taxable

How to File Your Cryptocurrency Taxes with TurboTax – CryptoTrader.Tax

First, its important to note that when investing and transacting with cryptocurrency, its taxed as property much like stocks, meaning you must report any capital gains and losses when disposing of it. Below are the most common crypto activities that you do need to report on your tax form:

  • Selling your crypto for cash
  • Trading one cryptocurrency for another digital currency
  • Using cryptocurrency at a merchant as payment

In addition to reporting gains and losses on tax returns, theres a few additional situations that you may need to account for. If you received cryptocurrency in the form of payment, you will need to report these events as income. Heres a few examples:

Can Losses Due To Crypto Exchange Hack / Scam Be Deducted

Losses that have occurred due to theft/hacks are no longer deductible as of tax year 2017.

There is a special case that allows such deductions but only if the theft/hack is attributable to a federally declared disaster which is unlikely to ever be the case with exchange hacks. Losses that occurred prior to 2017 may be deductible as long as you can prove ownership of the assets and can provide a declaration or receipt of some kind from the exchange which specifies how much you lost in the hack.

How Is Tax On Crypto Mining Calculated

Every time you dispose of your mined cryptocurrency, thats a taxable event, incurring a capital loss of capital gain. The value of your crypto asset on the date you purchased it will be your cost basis. Then, to get your capital loss or gain, you have to deduct that value from the exact amount of the crypto when selling it in the market.

Hence, youll have capital gains if the selling value of the crypto is higher than the cost basis. It also depends on the holding period and the total amount of the taxable income. However, youll have capital losses if the selling crypto value is lower than your cost basis. This is how you should determine the cryptocurrency mining taxes you owe on every successful mining of virtual currency.

Read Also: How To Receive Crypto On Coinbase

Detailing Taxes On Cryptocurrency

As stated previously, the IRS classifies cryptocurrencies as property. Traders are to pay income tax on their holdings, be it gains or losses. This means that to pay taxes on cryptocurrency, one must track the price at which the asset was purchased. Of course, day trading cryptocurrency taxes are a little different. If you day trade, you must keep trade of all of these prices and when you sold or converted assets as well. Losses, of course, can be written off.

Then we have something called short-term or long-term gains. Short-term gains are when you hold an asset for less than a year or sell it for a profit. However, holding cryptocurrency for longer than a year makes it a long-term gain. These result in lower tax rates for a trader, meaning those who hold will pay less to the government overall, and can very from a 15% to 20% tax. But regardless, unlike those who hold assets for less than a year, those who hold for over 365 days must pay capital gains tax on that cryptocurrency. This is declared on Form 8949 to the IRS.

Understand Your Cryptocurrency Taxes

Cryptocurrency and Taxes: How to File &  Calculate Taxes on ...

If youve made any money on crypto in the past year, youre going to have to pay taxes, meaning that youll need to set aside money from whatever profit you generate through cryptocurrency to pay the IRS. Overspending can put you in a difficult position come tax time, so its best to consult with a trusted tax advisor to receive estimates on how much youll owe.

Its also important to remember that holding investments for the long-term, or over for more than one year, can lighten your tax burden overall. Cryptocurrencies that are part of a diverse stock portfolio can make for a great long-term investment.

MoneyLion offers fully-managed investment portfolios that are customized to your individualized investing needs. Theres no minimum investment requirement nor are there any management fees! Youll only need to pay a flat rate of $1 per month to keep your account open and active.

Learn more about MoneyLion investment accounts here.

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Include Total In Schedule D

You will pass these gains and losses on to Schedule D, which is included on the Personal Income Tax Form known as Form 1040. Form 1040 includes several other schedules for a variety of concerns, such as Schedule C, which documents profits and losses from business activity, and Schedule E, which documents income from rental properties.

When all the schedules are factored in, the taxpayer will be able to determine the total amount of income taxes they will be paying or the tax refund they will receive.

Filing taxes will be a little different if a crypto investor operates as a different type of entity than a sole proprietor or an LLC. If, for instance, they have organized their operations under an S-Corp, they will need to file a corporate tax return .

To learn more about the most advantageous entity structures for taxes, check out the Anderson Advisors Tax Wise Workshop for business owners and investors!

Its a good idea to save record of your tax filing for at least seven years, although some individuals choose to save them for longer. If you are using a software-based form of accounting, youll likely have the option of saving your tax returns for as long as youd like.

Does The Source Of Income Matter

Yes.

If you earned income from cryptocurrency from a US source you will need to pay tax on the amount of profit gained.

If you earned your cryptocurrency profit from a different country, you will not have a US tax liability but may have tax requirements in the country where the digital currency was bought and sold.

Also Check: How To Calculate Crypto Gains

How To Safely Report Cryptocurrency Holdings

Reporting your income accurately with the IRS is the best way to stay out of the hot seat. To report your income on your taxes you will need to fill out form 8949. Form 8949 is used to report the sale or exchange of assets to the IRS. You will also need to fill out Schedule D to report capital gains or losses. Schedule D accompanies your 1040.

You could receive a 1099-K from your exchange. Cryptocurrency exchanges like Coinbase are only required to issue Form 1099-K if you earn over $20,000 with over 200 transactions. If you get a 1099-K, the IRS gets one too. Make sure you report the totals accurately, or the IRS will immediately know youre fibbing.

Mining crypto allows users to generate free coins in exchange for use of their computing power, but mined coins are subject to income taxes.

Do You Pay Tax When You Buy Goods And Services With Crypto

Crypto Taxes 101 – How to File Your U.S. Cryptocurrency Taxes | ZenLedger

Taylor owns 5 bitcoin, each of which she bought for $100 pre-2014. Taking advantage of her new found wealth, Taylor uses 3 bitcoin to purchase a new Tesla for $51,000. At the time of buying the car, 1 bitcoin is worth $17,000.

In this example, Taylor incurs a taxable event when she disposes of her bitcoin for the new Tesla. She incurs a $50,700 capital gain in doing so and needs to report this capital gain on her taxes.

Also Check: What Can I Purchase With Bitcoin

Earning Cryptocurrencies Through Mining

Cryptocurrencies are commonly acquired in two ways:

  • bought through a cryptocurrency exchange
  • earned through mining

Mining involves using specialized computers to solve complicated mathematical problems which confirm cryptocurrency transactions. Miners will include cryptocurrency transactions into blocks, and try to guess a number that will create a valid block. A valid block is accepted by the corresponding cryptocurrencys network and becomes part of a public ledger, known as a blockchain. When a miner successfully creates a valid block, they will receive two payments in a single payment amount. One payment represents the creation of new cryptocurrency on the network and the other payment represents the fees from transactions included in the newly validated block. Those who perform the mining processes are paid in the cryptocurrency that they are validating.

The income tax treatment for cryptocurrency miners is different depending on whether their mining activities are a personal activity or a business activity. This is decided case by case. A hobby is generally undertaken for pleasure, entertainment or enjoyment, rather than for business reasons. But if a hobby is pursued in a sufficiently commercial and businesslike way, it can be considered a business activity and will be taxed as such.

Consider Working With A Professional

Even if you arent conducting complex crypto activities, and just have questions about your specific tax obligation or youre unsure if youre reporting correctly, consider working with a tax professional who has experience interpreting tax code related to virtual currencies.

The IRS and other regulators cannot issue guidance on every situation a taxpayer may run into, and there are plenty of gaps in current guidance. Thats why its important to look for a tax professional familiar with current IRS guidance and has experience reporting cryptocurrency gains and losses, Chandrasekera says. Ask potential tax pros if they own any virtual currency themselves, and make sure they acknowledge the uncertainties in the tax code.

There are some gray areas, and thats where CPAs need to come in and say, OK, we dont have direct guidance from the IRS, but when they set up the guidance, this was the intention, Chandrasekera says. As CPAs, we should be able to use our experience and our overall knowledge about the tax code and apply those rules to the unique cases that we see.

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How To Minimize Crypto Taxes

Now that you know a bit more about crypto taxes, which is really just another way of saying capital gains taxes, you will want a set of strategies to minimize how much you pay to the IRS. Here are some useful tips to reduce your tax bill.

1. Hold Until Your Short-Term Gains Turn Into Long-Term Gains

As just noted, different capital gains rates will apply depending on how long you own cryptocurrency. If you want to lower your tax bill, hold your cryptocurrency long enough to turn your short-term gains into long-term gains. It may not be an easy task, but if you have the patience and fortitude to keep your crypto for at least a year before selling, then youll likely pay a reduced tax rate on any capital gain.

Heres an example: Mary, a single taxpayer, earns $70,000 in wages for 2021. She also has $5,000 in capital gains from the sale of cryptocurrency. If the gain is short-term gain, shell have $75,000 of ordinary income. After claiming the standard deduction, that leaves her with $62,450 of taxable income, which puts her in the 22% tax bracket and results in a tax bill of $9,488. However, if the gain is long-term gain, the $70,000 of ordinary income, minus the standard deduction, is still taxed in the 22% bracket, but the $5,000 of capital gain income is only taxed at 15%. That means an overall tax of $9,138 and a savings of $350.

2. Offset Capital Gains with Capital Losses

3. Sell In a Low-Income Year

What Are Some Special Considerations For Cryptocurrency Taxes

Cryptocurrency and Taxes: What You Need to Know

Taxation of Bitcoin and its reporting is not as simple as it seems. For starters, the volatility of bitcoin price makes it difficult to determine fair value of the cryptocurrency on purchase and sale transactions. It is also difficult to use identify the appropriate accounting method for use in cryptocurrency taxation. Last In, First Out and Highest In, First Out have the potential to decrease taxes but the IRS has approved very few instances of their use for crypto traders. First In, First Out is the most commonly-used method for cryptocurrency accounting.

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When Do You Owe Taxes On Your Crypto

Whenever you incur a taxable event from your crypto investing activity, you incur a tax reporting requirement.

A taxable event simply refers to a scenario in which you trigger or realize income. As seen in the IRS virtual currency guidance, the following are all considered taxable events for cryptocurrency:

  • Trading crypto to fiat currency like the US dollar
  • Trading one crypto for another cryptocurrency
  • Spending crypto to purchase goods or services
  • Earning crypto as income
  • Below, we run through practical examples to illustrate each of these taxable events.

    Tax Type : Crypto Capital Gains Tax

    A capital gain is the profit or loss you make from trading or selling crypto:

    Capital gain = selling price - buying price - fees

    Your buying price + associated fees are also known as the cost-basis or just basis in accounting lingo.

    For example, if you bought 1 BTC for 1000 USD and also paid a fee of $10, then your cost basis is $1010. If you later sell the Bitcoin for $1500 then you will realize a capital gain of $1500 – $1000 – $10 = $490. You will have to pay a capital gains tax on this amount – we will go deeper into how much tax you will have to pay in the next section.

    Here’s a breakdown of the most common crypto scenarios and where capital gains tax is applicable:

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    I Sold My Bitcoin In 2020 How Much Do I Owe

    It depends on how long you held the bitcoin and whether you sold it for a profit or a loss. If you owned your bitcoin for more than a year, you will pay a long-term capital gains tax rate on your profit, which is determined by your income. For single filers, the capital gains tax rate is 0% if you earn up to $40,000 per year, 15% if you earn up to $441,450 and 20% if you make more than that. This IRS worksheet can help you do the math.

    If you owned your crypto for less than 12 months, the taxes you pay will be the same as your normal income tax rate.

    If you sold your crypto for a loss, there’s some good news. “What people don’t always remember is that if you sell it, and you lost money, that’s a write-off of the amount you lost,” Weiss says. “It’s important that people look for not just where they made money, but also where they lost money.”

    You can use your losses to lower your taxable income by a maximum of $3,000 and can carry over any additional losses to future years.

    How Does The Irs Know About Your Crypto

    How To Do Taxes For Bitcoin: Cryptocurrency

    The IRS uses a variety of tactics to detect cryptocurrency investments and unreported income. The most predominant of which is the 1099 reporting system.

    Major exchanges like Coinbase, Gemini, Uphold, Kraken, and others report certain customer activity to the IRS using form 1099-K and/or other related 1099âs. These 1099âs all serve the same general purpose: to report non-employment related income to the IRS.

    Both you and the IRS get sent a copy of these forms at year-end.

    If the IRS receives a 1099 from your crypto exchange but sees no cryptocurrency income reported on your taxes, your account will be flagged and an automated CP2000 letterwill be sent alerting you of your non-reported income and tax liability.

    You can learn more about how 1099-K works for your crypto exchange activity here.

    Outside of 1099 reporting, the IRS works with blockchain analytics companies like Chainalysis to track cryptocurrency movements directly on-chain. Since 2015, the IRS has spent more than 10 million dollars on Chainalysis contracts. They use this data to identify tax fraud and money laundering.

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    Calculating Your Crypto Taxes

    Let’s look at how capital gains are calculated by way of an example.

  • John bought 1 BTC for $1000 on 1st July 2020.
  • He traded it for 20 ETH on 5th July 2020. The market value of 20 ETH at this point was $1500.
  • He also received 0.15 ETH from Coinbase as a signup bonus.
  • To calculate the crypto taxes for John we are going to use Koinly which is a free online crypto tax calculator.

    After entering the 3 transactions into Koinly manually, this is the output:

    We can see the gain/loss on each transaction clearly. Navigating to the Tax Reports page also shows us the total capital gains.

    As you can see, John will have a taxable capital gain of $500 along with a taxable income of $10 from cryptocurrencies. Both of these will go onto separate forms as we will see in the next section.

    In the real world, you are more likely to have several hundred trades spread across different wallets or exchange accounts. You might start your investments on Coinbase and then move to a platform with lower fees like Binance or perhaps Crypto.com. Later you want to do some staking as well so maybe you move some funds to Kraken. Somehow you also end up with some futures trades on Bitmex etc.

    This can all become a mess rather quickly which is why we developed Koinly – a cryptocurrency tax software that uses AI to unravel your cryptocurrency movement and generate accurate tax reports. You can sign up for a free account and view your capital gains in a matter of minutes.

    Bitcoin Used To Pay For Goods And Services Taxed As Income

    If you are an employer paying with Bitcoin, you must report employee earnings to the IRS on W-2 forms.

    • You must convert the Bitcoin value to U.S. dollars as of the date each payment is made and keep careful records.
    • Wages paid in virtual currency are subject to withholding to the same extent as dollar wages.

    Employees must report their total W-2 wages in dollars, even if earned as Bitcoin. Self-employed individuals with Bitcoin gains or losses from sales transactions also must convert the virtual currency to dollars as of the day received, and report the figures on their tax returns.

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