How To Calculate Gains And Losses
Say you have the following transaction history on Coinbase:
- 1/1/21 – Buy 1 BTC for $29,000
- 2/2/21 – Buy 1 BTC for $36,000
- 3/3/21 – Buy 1 BTC for $50,000
- 4/4/21 – Trade 0.5 BTC for 14.5 ETH
With this transaction history, you first trigger a taxable event when you trade 0.5 BTC for 8 ETH. To calculate the gain/loss, you need to subtract your cost basis of 0.5 BTC from the fair market value at the time of the trade.
The question here is, what is your cost basis in the 0.5 BTC that you traded for 8 ETH? After all, you have purchased 3 different bitcoins all at different prices prior to this trade.
To answer this, you have to determine which bitcoin you are disposing of in this scenario.
To determine the order in which you sell various cryptocurrencies, accountants use specific costing methods like First-In First-Out or Last-In First-Out . The standard method is First-in First-out.
Understanding The Cryptocurrency Tax Rate
What is the cryptocurrency tax rate? What factors affect the tax rate? How does it differ for mining vs. trading crypto? If you’ve got any questions on how cryptocurrency is taxed, you’ve come to the right place.
As the IRS continues to come down heavily on crypto tax compliance, it has become increasingly important to understand just how crypto is taxed.
In this post, well cover what you need to know about crypto tax rates in 2021.
Reporting Crypto Ordinary Income
Unfortunately, ordinary income doesnât fall nicely onto one tax form like we saw with capital gains and Form 8949.
The ordinary income you receive from mining, staking, interest accounts, or perhaps crypto you received as payment from a job get reported on different tax forms, depending on the specific situation.
Schedule C – If you earned crypto as a business entity, like receiving payments for a job or running a cryptocurrency mining operation, this is often treated as self-employment income and is reported on Schedule C.
Schedule B – If you earned staking income or interest rewards from lending out your crypto, this income is generally reported on Schedule B.
Schedule 1 – If you earned crypto from airdrops, forks, or other crypto wages and hobby income, this is generally reported on Schedule 1 as other income.
To make things easier for investors, CryptoTrader.Tax generates a complete income report that is included with your completed crypto tax reports. This report details the US Dollar value of all of your cryptocurrency income events that you received throughout the year: mining, staking, airdrops, and more. This income report can be used to complete your relevant ordinary income tax forms like Schedule 1, Schedule B, and Schedule C.
If you have any questions about how your crypto-related income needs to be reported, feel free to reach our live-chat customer support team via the chat widget on our homepage. We’re happy to answer any of your questions!
You May Like: How Do Taxes On Crypto Work
How Are Crypto Taxes On Capital Gains Determined
The length of time that you hold your crypto will affect the amount of capital gains you will be liable to pay.
- If you hold cryptocurrencies for 12 months or less, short-term capital gains tax will apply.
- If you hold crypto for more than 12 months you will be subject to long-term capital gains tax treatment.
According to the IRS, your holding period begins the day after you purchase a crypto. So, its important to know when you received your crypto asset and what tax rates and rules apply when you sell or trade it.
If You Sell Or Spend Cryptocurrency
If you mine, buy, or receive cryptocurrency and eventually sell or spend it, you have a capital gain or loss just as you would if you sold shares of stock. This is where cryptocurrency taxes can get complicated.
For example, let’s say you receive $200 worth of the cryptocurrency Litecoin in exchange for services on January 15. Six months later, on July 15, the fair market value of your Litecoin has increased to $400, and you use it to buy plane tickets for a vacation. On your tax return for that year, you should report $200 of ordinary income for the payment of Litecoin in January and a short-term capital gain of $200. That’s the $400 value of your Litecoin when you purchased the plane tickets, minus your $200 basis when you received the Litecoin.
Those two cryptocurrency transactions are easy enough to track. But imagine you purchase $1,000 worth of Litecoin, load it onto a cryptocurrency debit card, and spend it over several months on coffee, groceries, lunches, and more. If, like most taxpayers, you think of cryptocurrency as a cash alternative and you aren’t keeping track of capital gains and losses for each of these transactions, it can be tough to unravel at year-end.
Recommended Reading: What Is The Meaning Of Bitcoin
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.
How Cryptocurrency Transactions Are Taxed
People might refer to cryptocurrency as a virtual currency, but it’s not a true currency in the eyes of the IRS. According to IRS Notice 2014-21, the IRS considers cryptocurrency to be property, and capital gains and losses need to be reported on Form 8949 and Schedule D.
Like other capital gains and losses, your gain may be short-term or long-term, depending on how long you held the cryptocurrency before selling or exchanging it.
- If you owned the cryptocurrency for one year or less before spending or selling it, any profits are short-term capital gains, which are taxed at your ordinary income rate.
- If you held the cryptocurrency for more than one year, any profits are long-term capital gains, subject to long-term capital gains tax rates.
How you report cryptocurrency on your tax return depends on how you got it and how you used it.
Also Check: How To Earn Money Cryptocurrency
How To Use The Cleartax Bitcoin Tax Calculator
The ClearTax Bitcoin Tax Calculator shows the short-term capital gains and long-term capital gains in seconds. To calculate the short-term capital gains:
- You must select the nature of the acquisition.
- Choose the holding period as less than three years or more than three years.
- Enter the sale price of the asset.
- You then enter the purchase price of the asset.
- Enter the transfer expenses if any.
- The ClearTax Bitcoin Tax Calculator shows you the short-term capital gains, the short-term capital gains tax, or the long-term capital gains and the long-term capital gains tax depending on the holding period of the bitcoin units.
Time To File Those Crypto Taxes Follow These Steps:
Step 1: To start, youll need a list of all your exchanges and transactions, including any 1099 forms received from exchanges.
Step 2: Next, calculate your capital gains and losses by subtracting your cost-basis, or the price you bought the asset at, from the price you sold the asset at .
Step 3: Fill out your capital gains and losses on IRS Form 8949 for all events taxable as property.
Step 4: Transfer totals from your IRS 8949 to Form 1040 Schedule D.
Step 5: Fill out any remaining cryptocurrency income on Form 1040 .
Thats it! At least for most people. If you are a higher volume trader, the process gets much more complex and its recommended that you use crypto tax automation software to calculate your gains and losses.
Keep in mind that the more attention you pay to the tax implications of your crypto transactions year round, the easier youll have it come tax time. Not only that, but by making strategic trades in loss positions, you can reduce your tax liability or even get a tax refund! Your future self will thank you later.
Recommended Reading: How Much Tax On Crypto Gains
How Are Crypto Gifts Taxed
If you are feeling generous, you can send a cryptocurrency gift to a friend or family member. Generally, cryptocurrency gifts are tax-free.
If you send a gift with a fair market value above $15,000, you will need to file a gift tax return. Remember, this form is for informational purposes and does not mean you will be required to pay taxes on your gift.
For more information, check out our guide to crypto gift taxes.
More From Smart Tax Planning:
Here’s a look at more tax-planning news.
“Be prepared to pay some tax,” said enrolled agent Adam Markowitz, vice president at Howard L Markowitz PA, CPA in Leesburg, Florida.
But calculating your balance can be tricky, he said, particularly if it was a year of heavy trading.
Also Check: What Is The Value Of All Bitcoins
Holding Crypto Avoid A Tax Nightmare By Planning Now
You don’t have to report crypto purchased with dollars , but you have to report everything else.
What’s bitcoin’s impact on your taxes this year?
While bitcoin continues to lose value, cryptocurrency investors, speculators and enthusiasts are now confronting another hurdle — the official beginning of a potentially nightmarish tax season. And if you hold bitcoin or any other virtual currency, this could complicate your taxes.
The IRS will ask everyone filing a return this year about their cryptocurrency activity, and plenty of people have questions about the tax implications of buying, selling and trading. The IRS treats virtual currencies, like bitcoin and ether — and even NFTs — differently from other assets and investments. And there are specific rules you’ll need to follow if you sold or traded those assets last year.
“The average investor needs to understand that cryptocurrency is not like any other type of currency out there. Cryptocurrency is treated as property for tax purposes,” says Shaun Hunley, a tax consultant at Thomson Reuters. “So anytime you’re going to use cryptocurrency or transact in cryptocurrency, you’re going to have the potential for gain or loss on tax return.”
There’s an important caveat, however. If you used fiat currency — that is, US dollars — to buy crypto assets in 2021, you don’t have to report anything about it on your return.
Most Crypto Activity Is Taxed As Property And You Need To Report More Than Just Cashing Out
Theres a common misconception that you have to report crypto taxes only when you sell your crypto for fiat currency. While that is indeed a taxable event, its not the only activity that you need to include on your return.
For most people who invest and trade cryptocurrency, its taxed as property much like stocks. That means youll have to report capital gains or losses on Form 8949 for the following activities:
- Selling your crypto for cash
- Trading one cryptocurrency for another cryptocurrency
- Using cryptocurrency at a merchant as payment
- Buying an NFT with crypto.
Don’t Miss: How Much Are Crypto Taxes
How Does The Gst/hst Apply To Cryptocurrency
Where a taxable property or service is exchanged for cryptocurrency, the GST/HST that applies to the property or service is calculated based on the fair market value of the cryptocurrency at the time of the exchange.
If your business accepts cryptocurrency as payment for taxable property or services, the value of the cryptocurrency for GST/HST purposes is calculated based on its fair market value at the time of the transaction.
Keep all records that show how you calculated the fair market value.
Do Crypto Gains Get Taxed And How Much
In addition to crypto trading and investment profits, interest earned from staking cryptocurrencies, mining and airdrops would also be taxed as ordinary income under the tax brackets accordingly.
For cryptocurrency miners, income generated in exchange for this work would also be taxed based on the entire value of the digital assets obtained by mining.
If you have received payment for goods and services in digital currencies, the payment also counts as taxable income. If you have converted or swapped cryptocurrencies, for example, Ethereum to Bitcoin, you would also be taxed on the gains you made in the transaction. Your Bitcoin tax rate would depend on multiple factors, which will be discussed in more detail in this article.
Activities including transferring digital assets between exchanges, buying cryptocurrencies, gifting digital currencies and donating virtual assets are not considered taxable events.
You May Like: How Much Money Is In Crypto
The Ultimate Crypto Tax Guide
Taxes arenât the first thing most investors consider when jumping into the world of Bitcoin and cryptocurrencies. However, as the IRS continues to crack down on crypto tax compliance, itâs becoming increasingly important to learn about how cryptocurrencies are taxed.
In this guide, we discuss everything you need to know about cryptocurrency taxes. From the high level tax implications to the actual tax forms you need to fill out, youâll learn all about what you need to stay compliant and get your taxes done properly.
This guide was created by the tax team at CryptoTrader.Tax, the #1 crypto tax software. Today, over 100,000 crypto investors use CryptoTrader.Tax to finish their crypto taxes in minutes. You can create a free account here.
This guide breaks down the specific crypto tax implications within the U.S. You can see other country-specific tax guides here.
Disclosure Of Crypto Assets In Schedule Of Assets And Liabilities
Ministry of Corporate Affairs mandatory compliance in disclosing gains and losses in virtual currencies. Also, the value of cryptocurrency as on the balance sheet date is to be reported. Accordingly, changes have been made in schedule III of the Companies Act starting from 1 April 2021. This mandate can be considered as the first move of the government towards regulating cryptocurrencies.
Please note that this mandate is only for companies, and no such compliance is required from the individual taxpayers. However, reporting and paying taxes on the gains on cryptocurrency is a must for all.
Read Also: Where Can I Spend Cryptocurrency
What Are The Crypto Mining Taxes
Crypto mining taxes are equivalent to that of ordinary income taxes. So, when you successfully mine virtual currency, you trigger a taxable event and must report the fair market value of the mined coins at the time of receipt as gross income.
The fair market value of the virtual currency will be added to your other taxable income received throughout the year. As of 2021, the ordinary income tax rates range from 10% to 37%.
Bitcoin Taxes In : A Guide To Tax Rules For Cryptocurrency
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list ofour partnersandhere’s how we make money.
The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.
With bitcoin, you can run afoul of the IRS in a few surprising ways, so it pays to learn the rules.
The big picture? Bitcoin and other cryptocurrencies that you buy, sell, mine or use to pay for things can be taxable. Also, if your employer or client pays you in bitcoin or other cryptocurrency, that money is taxable income. You report your transactions in U.S. dollars, which generally means converting the value of your cryptocurrency to dollars when you buy, sell, mine or use it.
Heres more on how using bitcoin can affect your taxes:
Also Check: What Is The Fastest Growing Cryptocurrency
What Are The Tax Implications Of Selling Mined Cryptocurrency
Selling mined cryptocurrency creates a second taxable event. When you dispose of cryptocurrency, such as through selling, you will incur either a capital gain or loss. Capital gains and losses can be calculated with this formula:
Capital Gains/Loss = Sale Price – Cost Basis
Your cost basis is the value of the cryptocurrency at the time it was mined . Subtract this value from the amount you sold the mined coins for to determine your capital gain or loss.
If the value of the crypto is higher at the time of sale then your cost basis, you have a capital gain. The taxes on cryptocurrency gains vary depending on your income and holding period. If the value is lower than the taxpayer will have a capital loss. Every sale or trade of mined crypto must be reported on an IRS 8949 cryptocurrency tax form.
If You Mine Cryptocurrency
Cryptocurrency mining refers to solving cartographic equations to validate and add cryptocurrency transactions to a blockchain. In exchange for this work, miners receive cryptocurrency.
If you earn cryptocurrency by mining it, it’s considered taxable income and will typically be reported on For 1099-NEC at the fair market value of the cryptocurrency on the day you received it just as if it were self-employment income.
You May Like: How Do You Get Cryptocurrency
Trading Cryptocurrency For Another Type Of Cryptocurrency
Generally, when you dispose of one type of cryptocurrency to acquire another cryptocurrency, the barter transaction rules apply. You have to convert the value of the cryptocurrency you received into Canadian dollars. This transaction is considered a disposition and you have to report it on your income tax return. Report the resulting gain or loss as either business income or a capital gain .
How To Report Taxes On Cryptocurrency Mining
Have you received any cryptocurrency from mining? Unsure about how crypto mining is treated for tax purposes, or just want to know more about how to report income from mining for the next tax season? In this article, we will explain everything you need to know related to the taxation of crypto assets received from mining. We will also go into detail about how and which costs you are allowed to deduct to reduce your total tax burden.
Read this article to learn about:
Tax rules for cryptocurrency mining can be different from country to country. In this guide, we will look at taxation rules from a US citizen perspective, but it is also meant to be a general guideline since the tax treatment of mining income is similar in many countries. Always clarify any questions you have with the tax agency in your country.
You May Like: Where To Buy Bitcoin Uk