Guide To Crypto Taxes: How Do Crypto Taxes Work
With the expansion of cryptocurrency throughout the globe, more and more investors are diving into the crypto space. Also, as the IRS brings out new tax compliances, it is very easy for investors to get confused. So a clear understanding of crypto taxes becomes all the more important.
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Do I Have To Pay Crypto Taxes For Play
If the rewards received from play-to-earn crypto/NFT games have value, then theyre considered ordinary income.
As these types of games become more popular, weve seen increasingly complicated situations arise. For example, in Axie Infinity, Managers and Scholars can work together and share rewards. These setups can create unexpected tax burdens and we recommend speaking to a tax professional before getting started.
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How Is Cryptocurrency Taxed The Basics
Crypto taxes are similar to taxes on stocks its treated as property, not currency, for tax purposes. Unfortunately, that means most transactions with cryptocurrency create what we call a taxable event. A taxable event is something that triggers a reporting requirement.
If youre wondering what the cryptocurrency tax rate is, its not a clear-cut answer. There are varying tax rates depending on each situation.
Generally, two types of tax apply to cryptocurrency : capital gains tax and income tax. There are different taxable events for each of these.
How To Determine If You Owe Crypto Taxes
You owe crypto taxes if you use your crypto in any way and it has increased in value from when you first bought it.
Here are the different types of taxable events for cryptocurrency transactions:
- Selling cryptocurrency for a fiat currency
- Using cryptocurrency to purchase goods or services
- Trading different types of cryptocurrency
These are only taxable events if the value of your crypto has gone up. To determine if you owe crypto taxes, you need the cost basis, which is the total amount you paid to acquire your crypto. Then you compare that to the sales price or proceeds when you used the crypto.
Let’s say you previously bought one bitcoin for $20,000. Here are examples of taxable events:
- If you sell one bitcoin for $50,000, you’d report $30,000 in gains.
- If you use one bitcoin to purchase a $45,000 car, you’d report $25,000 in gains.
- If you trade one bitcoin for $50,000 of another cryptocurrency, you’d report $30,000 in gains.
Trades between coins are where crypto taxes get complicated. A crypto trade is a taxable event. If you trade one cryptocurrency for another, you’re required to report any gains in U.S. dollars on your tax return.
Every time you trade cryptocurrencies, you need to keep track of how much you gained or lost in U.S. dollars. That way you can accurately report your crypto gains or losses. If you’d rather keep it simple, cryptocurrency stocks could make it easier to track gains and losses compared to buying and selling specific coins.
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How To Avoid Irs Penalties
When it comes to cryptocurrency taxes, keep things as honest and transparent as possible. The IRS views cryptocurrency as property, and so any capital gains acquired from the sale or transfer of said property must be reported as income, the same as the sale or transfer of any other asset. You are also allowed to report losses if sales or transfers resulted in a capital loss. Then, you can write off up to $3,000.
To avoid IRS penalties, always report your earnings accurately. You should accurately calculate losses or gains to ensure your figures are correct. To determine your capital loss/gain, take the purchase price of your position, including fees, and subtract it from the selling price. If the number is negative, you took a loss. If its positive, you profited. Accurate recordkeeping is absolutely essential, even for crypto traders.
How Do Defi Taxes Work
Recently, cryptocurrency lending platforms and other DeFi services like Uniswap, Maker, and Compound have exploded in popularity.
Receiving interest income from crypto lending activities or liquidity pools is considered a form of taxable income and must be reported on your taxesâsimilar to mining and staking rewards.
The full tax implications associated with transactions common to the DeFi landscape are outside of the scope of this piece however, we discuss them thoroughly in our Defi Crypto Tax Guide.
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A Gift Of Crypto Is Treated The Same As Other Gifts
If youve given cryptocurrency to someone, perhaps a younger relative as a way to spark interest, your gift will be treated the same way as any similar gift would be. So it can be subject to the gift tax if its over $15,000 in 2021 . And if it comes time for the recipient to sell the gift, the cost basis remains the same as the givers cost basis.
That said, there are some ways to escape the gift tax, even if you go over the annual threshold, such as taking advantage of the lifetime exemption.
How To Handle Cryptocurrency Transactions On Your Tax Return
You can usually download a transaction report from your cryptocurrency exchange platform, including all of your buys, sells, and exchanges of cryptocurrency in your account. If all of your cryptocurrency transactions occur on one exchange, gathering the information you need to report transactions on your tax return should be relatively easy. If you have cryptocurrency transactions on several exchanges, you’ll need to download several reports.
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What Is The Cryptocurrency Long
On the other hand, if you sold your crypto after holding it for over one year, these gains would be taxed at the long-term capital gains tax rate, separate from your ordinary income. These are currently taxed at 0%, 15%, or 20% depending on your income and filing status. Comparing the two charts, these rates are lower than the short-term capital gains rate, so it is considered a tax advantage to hold your crypto assets for more than 12 months.
Tax Tools For Bitcoin
Casual Bitcoin users might want to consider using a reputable Bitcoin wallet provider that has implemented risk-mitigation tools to make buying, trading, and selling Bitcoin more secure and user-friendly. Even aside from tax considerations, investors should take a look at wallet providers or registered investment vehicles with the kind of security features that one might expect from a banking institution.
These tools might come in handy both when you’re handling transactions and when you’re planning for taxes.
BitcoinTaxes, web-based software for importing data and calculating gains/losses, can be helpful as well.
Capital Assets And Cryptocurrency
If you sell your home because youre moving or sell some stocks because you want to take your profit, these properties are considered capital assets. Its similar for virtual currencies. You pay capital gains taxes on themeither short or long termon your Schedule D. These are calculated just like other capital gains and losses: You take your cost basis and calculate how much its gone up or down since that date. Capital gains rates for the 2020 tax year can be 0, 15, or 20 percent, depending on your taxable income.
If youre selling property as a part of a business or trade, however, the property is not considered a capital asset and is taxed as ordinary income. This applies to virtual currency sales, too. The IRS looks at the character of the gain or lossyour intent, or why youre selling.
The IRS has made a lot of information about virtual currency and taxes available online. To dig deeper, visit this page of FAQs or read IRS Notice 2014-21.
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.
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Bitcoin And Other Cryptocurrencies Are Property
In 2014, the IRS issued a notice declaring that for tax purposes, cryptocurrency is property, not currency. That may sound like a trivial distinction, but in this case its the basis for when the IRS decides whether individuals owe taxes.
These bitcoin tax consequences revolve around what the government agency calls a realization event. Here’s how it boils down:
If you acquired a bitcoin from mining, that value is taxable immediately no need to sell the currency to create a tax liability.
If you disposed of or used bitcoin by cashing it on an exchange or buying goods and services, you will owe taxes if the realized value is greater than the price at which you acquired the bitcoin. You may have a capital gain thats taxable at either short-term or long-term rates.
Many people think that theres no tax consequences when they sell an object its for personal use and theyre expecting to lose money on it anyway, whether it be a car, an appliance or another piece of property, says Brian R. Harris, a tax attorney at law firm Akerman LLP in Tampa, Florida. Many people arent in the mind-set of holding tangible objects for investment and then recognizing gains when they ultimately sell them.
But if theres been a gain from the bitcoin owners cost basis, theres a tax liability, he says.
How Is Crypto Interest Taxed
Currently, platforms like Gemini and BlockFi offer users interest rewards for holding select cryptocurrencies. Meanwhile, DeFi protocols like Compound offer users rewards for staking crypto.
Cryptocurrency interest and crypto staking rewards are both considered personal income and are taxed accordingly.
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How To Do Your Cryptocom Taxes
Are you a Crypto.com user looking to file your taxes?
Trying to report your cryptocurrency on your tax return can be a stressful experience. In this article, weâll break down the fundamentals of how cryptocurrency is taxed and walk you through a simple step-by-step process on how to file your Crypto.com taxes.
Cryptocurrency And Taxes: Transacting With Of Cryptos
To talk about transacting is to define how an individual uses his or her cryptocurrency investment. Generally speaking, the possession and holding of cryptocurrency is not taxable. In other words, one can have purchased Bitcoins in 2010 and still own them to this day.
However, the following actions must be reported and are taxable:
- The sale or donation of cryptocurrency
- The exchange of cryptocurrency that also includes obtaining another cryptocurrency
- The conversion of cryptocurrency into a currency, such as Canadian dollars
- Using the cryptocurrency for purchases of goods or services.
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Keep Track Of Your Crypto And Nft Transactions
If youre buying, selling, and trading crypto and NFTs, youll need to keep track of your transactions. Here are some details you’ll want to note as you track your crypto and NFT transactions:
- How much you bought and the value in U.S. dollars
- When you sell, how much you sold, and the value in U.S. dollars
- If you convert your crypto to another token or use it to buy an NFT, the U.S. dollar value of the amount youre selling or converting
- The amount and U.S. dollar value of the new asset, whether its a different token or an NFT. This will be used as your cost basis for the new asset down the road.
- Fees associated with your transaction, including gas fees and miner fees, if applicable. You can subtract the fees you pay from your gains.
- The gain from the transaction
When using an exchange like Coinbase or Gemini, or trading crypto with an app like Robinhood or Webull, you can see your transaction history, helping you keep track of your cost basis and gains.Otherwise, you might need to keep track of your transactions on your own. You might be able to use a spreadsheet or a tool like Kubera to track your transactions.
Crypto Capital Gains Tax
Capital gains are profits made from buying and selling property like stocks, real estate, and crypto. For many taxpayers, the majority of crypto taxes come from this category. In simple terms, what you made minus what you initially paid is a capital gain.
For example, if you bought BTC for $5,000 and sold it for $20,000, then you have a capital gain of $15,000.
If you paid more for the cryptocurrency than you sold it for, then you have a capital loss.
Capital gains taxable events include:
- Selling crypto for USD/fiat
- Exchanging one type of crypto for another
- Paying for goods and services with crypto
The tax rate for capital gains depends on how long you held the asset. For short-term gains , the tax rate is the same as your income tax rate. For long-term gains, the tax rate is 0%, 15%, or 20%, depending on the amount.*
*A higher tax rate has been proposed for long-term capital gains, but it has not been passed as of the time of publication.
Well go through examples of each taxable event below.
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The Irs And Virtual Currency
The IRS has indicated that virtual currency doesn’t have status as legal tender in any jurisdiction. It’s referred to as “convertible” virtual currency if it has an equivalent value in real currency, or if it ever serves in place of real currency. It can be exchanged into another currency, either real or virtual, and it can be digitally traded.
Do I Have To Pay Taxes On Crypto
Yes, cryptocurrency trading is taxable. Any cryptocurrency earnings or transactions that resulted in gains become a taxable event. The IRS views cryptocurrency as an asset similar to stocks and other taxable investments and must be included in tax filings.
While crypto is making headlines in the news recently, the IRS issued a notice on the topic as far back as 2014. According to the IRS:
In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.
With the rising popularity of crypto, the IRS has been taking measures to ensure that crypto investors fulfill their tax obligations. In 2019, the IRS sent letters to over 10,000 taxpayers who potentially failed to report income from cryptocurrency transactions. The letters served as a warning and instruction to pay back taxes owed for crypto income.
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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.
An Example Of Capital Gains Tax
Suppose you purchased Bitcoin for $30,000. You then sell it for $50,000, so you have a $20,000 capital gain. This would be a short-term gain if you held the Bitcoin for a year or less, so it would be taxed as ordinary income according to your tax bracket. It’s a long-term gain taxed at a rate of either 0%, 15%, or 20%, depending on your overall income, if you owned the Bitcoin for longer than a year.
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