What Is Cost Basis
Cost Basis represents how much money you put into purchasing your property . Cost basis includes purchase price plus all other costs associated with purchasing your cryptocurrency .
From our examples above, itâs easy to see this formula in action. If you buy 1 Litecoin for $250, your cost basis is $250 per Litecoin. If you sell or trade it when itâs worth $400, that $400 is the fair market value. Applying the formula:
$400 – $250 = $150 Gain
Now, letâs dive into a more complex example to see how you would calculate your gains and losses using this same formula when you have a number of transactions instead of just one or two.
Is It Business Income Or Capital Gain
The income you get from disposing of cryptocurrency may be considered business income or a capital gain. In order to report it correctly, you must first establish what kind of income it is.
The following are common signs that you may be carrying on a business:
- you carry on activity for commercial reasons and in a commercially viable way
- you undertake activities in a businesslike manner, which might include preparing a business plan and acquiring capital assets or inventory
- you promote a product or service
- you show that you intend to make a profit, even if you are unlikely to do so in the short term
Business activities normally involve some regularity or a repetitive process over time. Each situation has to be looked at separately.
In some cases, a single transaction can be considered a business, for example when it is an adventure or concern in the nature of trade. Whether you are carrying on a business or not must be determined on a case by case basis. For more information, please review our archived content on an adventure or concern in the nature of trade.
Some examples of cryptocurrency businesses are:
- cryptocurrency mining
- cryptocurrency trading
- cryptocurrency exchanges, including ATMs
How To Calculate Crypto Taxes
If exchanges don’t provide Form 1099-B, you may be left with each broker’s spreadsheet of transactions or other reporting options, which may still be difficult to reconcile.
“The best thing to do is try to reverse-engineer it,” said Metras.
You can reconstruct records by importing each exchange’s files into crypto tax reporting software.
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Keep A Record Of All Your Crypto Activity
The IRS says you need to keep a record of all the money you have made or lost on your cryptocurrency investments. This includes any money that was given to you as an airdrop if you had an interest in lending and other things. Most exchanges have built-in tax reporting features that will help you do this, but there are also third-party services that will help you keep track of your cryptocurrency transactions.
Keeping Books And Records
If you acquire or dispose of cryptocurrency, you have to keep records of your cryptocurrency transactions. This also applies to businesses that accept cryptocurrency as payment for goods and services.
Cryptocurrency exchanges have different standards for the kinds of records they keep and how long they keep them. If you use cryptocurrency exchanges, we suggest that you export information from these exchanges periodically to avoid losing the information necessary to report your transactions. You are responsible for keeping all required records and supporting documents for at least six years from the end of the last tax year they relate to.
You should maintain the following records on your cryptocurrency transactions:
- the date of the transactions
- the receipts of purchase or transfer of cryptocurrency
- the value of the cryptocurrency in Canadian dollars at the time of the transaction
- the digital wallet records and cryptocurrency addresses
- a description of the transaction and the other party
- the exchange records
- the software costs related to managing your tax affairs.
If you are a miner, also keep the following records:
- receipts for the purchase of cryptocurrency mining hardware
- receipts to support your expenses and other records associated with the mining operation
- the mining pool details and records
For more information, please review our link on keeping records.
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How Cryptocurrency Is Treated For Tax Purposes
Many people are quick to point out how cryptocurrency is not backed by any government and, thus, subject to less regulation than fiat currencies like the dollar or euro. This lack of oversight has led many to believe that cryptocurrency investors are participating in elusive and anonymous transactions that allowed them to avoid paying taxes. However, this belief is absolutely false. In the United States, crypto exchanges must report user activity on gains and losses to the Internal Revenue Service , and cryptocurrency is taxed in much the same way as traditional stocks or similar assets.
Cryptocurrency is considered “property” for federal income tax purposes, meaning the IRS treats it as a capital asset. This means the crypto taxes you pay are the same as the taxes you might owe when realizing a gain or loss on the sale or exchange of a capital asset.
For instance, when you purchase a capital asset be it a stock, bond, exchange-traded fund, house, Bitcoin, or any other investment you initiate a basis equal to your cost to acquire it. When it comes time to sell your capital asset, you simply compare your net sales proceeds to your original basis to determine whether you have a capital loss or a capital gain. If the proceeds exceed your original cost basis, you realize a capital gain. When reversed, you’ve locked in a capital loss.
Crypto Tax Rates: Short
Tynisa Gaines, EAUpdated at: Feb 15th, 2022
The length of time you hold a crypto asset affects how it will be taxed when it is sold or traded. If you hold crypto for a year or less, its a short-term sale. If you hold crypto for more than a year, its a long-term sale. In the U.S. and many other countries, long-term gains are taxed at a lower tax rate, making them advantageous for investors.
When you have a taxable event, like a sale, trade, or purchase of goods and services, you recognize a capital gain or loss. Per the IRSs cryptocurrency tax FAQs, the holding period begins on the day after you receive an asset.
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Consider Investing Through A Retirement Plan
If you invest in crypto using a retirement plan like a traditional IRA or Roth IRA, you can defer or avoid investment gains entirely, though its not as easy as investing through a normal brokerage account.
There are ways to get crypto into tax advantaged vehicles like an individual retirement account , but it is not that common and not that easy , says Hoopes. Right now if youd like to open a crypto or Bitcoin IRA, youd need to open a specialty account called a self-directed IRA with boutique firms that offer crypto investing.
What Are The Cryptocurrency Tax Rates For 2021
Cryptocurrency tax rates depend on your income, tax filing status, and the length of time you owned your crypto before selling it. If you owned it for 365 days or less, then you pay short-term gains taxes, which are equal to income taxes. If you owned it for longer, then you pay long-term gains taxes.
Here are cryptocurrency tax rates for 2021 on long-term gains:
Data source: IRS.
You can choose to sell older coins first to pay the lower long-term gains tax rates. Imagine you’ve been buying Bitcoin regularly for the past two years and now you’ve decided to sell some. By selling Bitcoin you’ve had for more than a year, it will be considered a long-term gain and you’ll pay a lower crypto tax rate on it.
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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.
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:
Below, we run through practical examples to illustrate each of these taxable events.
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Moving Cryptocurrency From One Wallet To Another
If youre simply moving your cryptocurrency from one wallet to another e.g. from Coinbase to GDAX or your own wallet then it would not be a taxable event as long as you havent sold any of your cryptocurrency during the process.
That being said, there might be some tax implications . . . sort of.
Lets say you paid a $10 transfer fee, well that would be a transaction cost which you could deduct from your capital gains later. The same applies to any fees you incur when you buy or sell your crypto.
Minimizing Capital Gains On Crypto
Its important to keep all your receipts for costs related to purchases of capital gains assets. These costs could include trading fees, withdrawal fees and any other costs incurred when purchasing or trading crypto.
The most effective way to minimize your crypto capital gains tax is to own the asset for over 12 months, as this will give you a 50% discount. The Swyftx cryptocurrency tax calculator will ask you if youve held your crypto asset for 12 months. If you have, the calculator will automatically apply a 50% discount to your capital gain.
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When Exactly Should You Pay Taxes On Your Cryptos
As opposed to indexed funds or company shares, assets you pay taxes on just once you sell them, with cryptos the situation is completely different.
There are many cryptos that, in order to be obtained, must be acquired with bitcoins or ethereums .
Once you sell your bitcoin or ethereal to acquire any other crypto , you will need to declare that transaction and pay taxes accordingly.
That is because during your sale you have experienced a gain , even though that income has translated into the possession of a new coin.
Then, in the future, if you sell those litecoin at a higher price than what you bought them for, you will pay taxes on that gain too.
Finally, bear in mind that the exchange between one coin into another is exempt from Value Added Tax , called IVA in Spain which is usually 21%. But if you buy any product or service with your cryptos, then VAT will apply.
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Example : Capital Gain Or Loss
Tim found a deal on a living room set at an online vendor that accepts Bitcoin. Tim acquired $3,500 worth of Bitcoin to buy the furniture with. By the time he bought the furniture and converted his remaining Bitcoin back into dollars, the value of Tims Bitcoin had increased by $500. The gain realized by Tim was on account of capital, so Tim has to report a $500 capital gain on his income tax return. However, only 50% of that capital gain is taxable.
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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Federal Capital Gains Tax Rates For Crypto
Your income from crypto transactions will be taxed as short-term gains if you held the asset for a year or less. The federal short-term capital gains rate is the same as the tax rate for income currently, it can range from 10% to 37%, depending on your total income.
If you hold the crypto for more than a year, then your profit from selling or disposing of it is considered a long-term capital gain. Long-term capital gains tax rates typically range from 0% to 20%, depending on your total income.
How Do I Report Income From Cryptocurrency
Report the gain on Form 8949 and Schedule D. If you use cryptocurrency to pay employee wages, the FMV of the currency counts as wages subject to federal income tax withholding, FICA tax and FUTA tax. Like any other wages paid to employees, you must report the wages to the employee and to the IRS on Form W-2.
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How Do I Report Bitcoins On My Taxes
Income from bitcoin dealings should be reported in Schedule D, which is an attachment of form 1040. 13 Depending upon the type of dealing which decides the type of income from cryptocurrencyordinary income or capital gainthe income should be reported under the correct head in the appropriate columns of the form.
Example : Business Income Or Loss
Alice regularly buys and sells various types of cryptocurrencies. She pays close attention to the fluctuations in the value of cryptocurrencies and intends to profit from the fluctuations. Her activities are consistent with someone who is engaged in the business of day trading. In 2017, Alice sold $240,000 worth of various cryptocurrencies, which she originally purchased for $200,000. Her net profit is $40,000. Since Alice is actively trading in cryptocurrency, which is a commercial activity, she has to report business income of $40,000 on her 2017 income tax return.
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Using Cryptocurrency To Pay For Goods And Services
A complicating factor for crypto investors arises when they attempt to use their virtual currency to pay for goods and services. The IRS chose to treat cryptocurrency as property in 2014 because most people only saw it as a capital asset at the time. Now, as more companies choose to accept cryptocurrency as a form of payment and people begin to adopt it as a unit of account, many people have begun to see it as a viable alternative currency. However, the current tax treatment of crypto impedes the wholesale replacement of fiat currency.
With traditional fiat currencies, you simply pay for your purchase and have no tax consequences related to cost basis or the value of your currency at the time of payment. However, cryptocurrency users must deal with capital gains and losses in addition to whatever sales taxes they might face at the point of sale.
For example, let’s imagine you bought $10 worth of Bitcoin two years ago and it has since appreciated to $100 in value. If you sold it on an exchange, you’d have $90 of realized long-term capital gains, just like you would with any other capital asset.
If you instead used that same $100 worth of Bitcoin to buy groceries from the supermarket, you’d still have to pay long-term capital gains taxes on the $90 difference between appreciated value and your cost basis.
Fill Out The Proper Tax Forms
Once you have a record of your crypto transactions, youll need to fill out certain tax forms depending on how you used your crypto:
- Form 8949. This form logs every purchase or sale of crypto as an investment. This should include the total number of coins, the date and price you bought, the date and price you sold and your gain or loss for each transaction.
- Schedule D. This form summarizes your total capital gains and capital losses from all investments, including crypto.
- Schedule C. If you received coins from mining, you need to disclose whether you received them as a business or as a hobby. If youre running a crypto mining business, you may owe self-employment taxes if your income exceeded your expenses for the year.
- Schedule 1. If you report your crypto mining as a hobby, youd report this income on Line 8 of Schedule 1. You wont owe self-employment tax, but you become more limited on what you can deduct as an expense.
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