Wednesday, June 29, 2022

How To Pay Taxes On Crypto

How To Mitigate Taxes On Crypto

How to Pay Zero Tax on Crypto (Legally)

There are two reasons to exercise caution while investing in cryptocurrency. First, fraud, money laundering and other illegal activities are not exactly rare in the crypto world. Second, as of early 2022 both the IRS and the SEC were still defining their approach to all forms of this asset class. This means that the IRS pays unusually close attention to cryptocurrency investments. The chances of an audit could be high. With these two cautions in mind, here are three ways to mitigate crypto taxes:

Crypto Tax Guide 202: How To Report Crypto On Your Taxes

Were here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey.Read moreWe develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide.We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right.Read less

Since Bitcoin was first introduced in 2009, interest in cryptocurrencies as an investment has slowly but surely gained steam. With this rise in popularity, it has led to increased scrutiny by tax authorities like the Internal Revenue Service . Because of this, its important that investors know the basics regarding filing and paying taxes on their cryptocurrency investments and income.

    Buy Crypto Currency In Your Ira

    The easiest way to defer or eliminate tax on your cryptocurrency investments is to buy inside of an IRA, 401-k, defined benefit, or other retirement plans. If you buy cryptocurrency inside of a traditional IRA, you will defer tax on the gains until you begin to take distributions. If you buy within a ROTH, you pay zero tax on the capital gains earned in the account.

    To buy cryptocurrency inside of a retirement account, you must move that account outside of the United States and into an offshore IRA LLC. Then that IRA LLC can open an offshore bank account and wallet to make the investment.

    Youll be the manager of the IRA LLC and in control of the investments. Youll be in total control of the account and the sole decision-maker.

    To get your IRA offshore, you first form the LLC in a zero tax country. Then you move your account from your current custodian to one that allows for offshore investments . Finally you open an international bank or brokerage account and transfer the cash from your retirement plan into that account.

    From here, you write the checks or send the wires. You make the investments and can choose cryptocurrency. If you want to invest in foreign real estate, physical gold, or crypto, go for it. You can also use your IRA to get residency in countries like Nicaragua or Panama.

    Fyi total annual contributions to your Traditional and Roth IRAs combined cannot exceed: $5,500 $6,500 .

    Read Also: What Is The Next Big Thing In Crypto

    Do You Pay Taxes On Crypto

    You’re required to pay taxes on crypto. The IRS classifies cryptocurrency as property, and cryptocurrency transactions are taxable by law just like transactions related to any other property.

    Taxes are due when you sell, trade, or dispose of cryptocurrency in any way and recognize a gain. For example, if you buy $1,000 of crypto and sell it later for $1,500, you would need to report and pay taxes on the profit of $500. If you dispose of cryptocurrency and recognize a loss, you can deduct that on your taxes.

    Buying crypto on its own isn’t a taxable event. You can buy and hold cryptocurrency without any taxes, even if the value increases. There needs to be a taxable event first, such as selling the cryptocurrency.

    The IRS has been taking steps to ensure that crypto investors pay their taxes. Tax filers must answer a question on Form 1040 asking if they had any type of transaction related to a virtual currency during the year.

    Crypto exchanges are required to file a 1099-K for clients who have more than 200 transactions and more than $20,000 in trading during the year. The IRS has also issued summonses to crypto exchanges to find investors who had at least $20,000 in cryptocurrency transactions from 2016 to 2020.

    Lower Your Taxable Earnings

    The Importance of Record Keeping for Crypto Taxes

    Reduced taxable income is another tried-and-true tax reduction strategy. In a low-income year, this is akin to selling valuable investments. This includes looking for tax credits and deductions to see whether they can help you lower your taxable income.

    You can use the money to pay for pricey medical treatments, contribute to a traditional IRA or 401 plan, establish a health savings account, or donate cash or property to charity, for example. You may also qualify for several other tax advantages and credits. You should also consult a tax specialist to determine if there are any extra tax benefits available to you.

    Recommended Reading: How To Set Up Bitcoin Wallet

    Defi Trading As An Individual

    As we already said, the tax treatment of your DeFi investments is all going to come down to whether the CRA view you as an individual investor or see your crypto investments as more similar to business income. They decide this on a case-by-case basis – but if you’re seen to be trading as an individual, you’ll pay Capital Gains Tax on any profits, not Income Tax.

    Buy Cryptocurrency As A Resident Of Puerto Rico

    If youre not old enough to have a large retirement account and dont want to lock up a couple of million dollars in a life insurance policy, then consider moving to the US territory of Puerto Rico. The Caribbean island of Puerto Rico has a tax deal you cant refuse!

    We US citizens are taxed on our worldwide income. No matter where we live, we must pay US tax on our capital gains, including gains from cryptocurrency. The only exception to this rule is found in the US territory of Puerto Rico.

    Puerto Rico sourced income is excluded from US tax under IRC Section 933. Puerto Rico sourced income is any capital gain or business income earned by a resident of the territory that qualifies for Act 20 or Act 22. A resident of the territory is any US citizen who spends at least 183 days a year on the island.

    Because the territory is excluded from Federal taxation, Puerto Rico is free to make its own tax laws for residents and offer any type of tax breaks it deems appropriate. And in 2012, with amendments in 2015 and 2017, this is exactly what they did. Its the amendments in 2017 that really made Puerto Rico the top offshore jurisdiction.

    If you set up an online business in Puerto Rico, and qualify under Act 20, your Puerto Rico sourced profits will be taxed at only 4%. Distributions or dividends from this company to a resident of Puerto Rico will be tax-free.

    Here is an amazing podcast with Paul Rosenberg, one of the original in Cryptocurrency.

    Also Check: When Will Crypto Market Recover

    How Is Cryptocurrency Taxed In The Us

    In 2014, the IRS issued Notice 2014-21 to clarify that virtual currency is treated as property for tax purposes cryptocurrency is taxed as a capital asset and the gain or loss of every taxable event must be reported on Form 8949.

    In 2019, the IRS started asking taxpayers about their virtual currency activity on their tax returns. Now, the question appears on the front of the Form 1040 and asks taxpayers t any time during , did you receive, sell, exchange, or dispose of any financial interest in any virtual currency?

    Crypto Income: An Explanation

    Crypto Tax Strategy | How To Save $$$ on Crypto Gains

    Depending on how you acquired your Bitcoin, you might have to report it as earned incomeeven if youre not running a business. Say you want to sell some cinema tickets for Bitcoin. The CRA would treat this as a barter transaction and count that Bitcoin as income. A barter transaction is an exchange that doesnt use legal currencies.

    Bitcoin youve earned from mining constitutes income. To mine crypto, you have to run specialised software on your computer and set it to crack complicated math puzzles for solving them, youll earn Bitcoin. You dont buy this Bitcoin from someone else the Bitcoin blockchain itself created the currency for you as a reward.

    Your tax obligations change if youre mining crypto as part of a business. If you start taking your hobby seriously, it could easily turn into a business. The CRA says: 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.

    Then theres yield farmingthe practice of locking up your cryptocurrency in a smart contract and earning yields. These yields can be quite lucrative. Its analogous to interest on a savings account, but instead of a bank lending out your funds or investing it as it likes, a decentralized and automated protocol does the work for you.

    For more complicated procedures like yield farming, it is advisable to speak with a professional tax advisor, and, if possible, one well-versed in cryptocurrencies.

    Don’t Miss: How To Set Up Bitcoin Wallet On Cash App

    There Is A Bit Of Relief For Bitcoin Taxes

    Bitcoin taxes can be a bummer, but at least you can deduct capital losses on bitcoin, just as you would for losses on stocks or bonds. These losses can offset other capital gains on sales. When youre done tallying your winners and losers, you cant write off a loss of more than $3,000.

    With drastic fluctuations in bitcoins price happening all the time, many bitcoin speculators will have losses. If you have losses on bitcoin or any other cryptocurrency, make sure you declare them on your tax return and see if you can reduce your tax liability.

    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.

    You May Like: How To Track Crypto Trades

    Is Crypto Taxed Like Stocks

    Crypto is taxed like stocks and other types of property. When you realize a gain after selling or disposing of crypto, you’re required to pay taxes on the amount of the gain. The tax rates for crypto gains are the same as capital gains taxes for stocks.

    Part of investing in crypto is recording your gains and losses, accurately reporting them, and paying your taxes. Like every investor, you want to keep this tax burden to a minimum. In closing, let’s look at a few effective ways to minimize crypto taxes:

    • Hold successful crypto investments for more than one year before selling or using them. Tax rates on these long-term gains are lower than rates on short-term gains.
    • Use tax loss harvesting. If you’ve had gains and losses on different types of cryptocurrency, you can sell both and use the losers to offset your gains.
    • Consider opening a crypto IRA. Like other IRAs, this type of account lets you make tax-deductible contributions and only pay taxes when you withdraw funds.

    Reporting Crypto Gains & Losses On Tax Returns

    5 Things You Should Know About Cryptocurrency

    When it comes to reporting your profits and losses from your cryptocurrency investments, it might be best to go through a qualified tax professional.

    In doing so, you can be sure that you are repotting the correct figures. This is especially the case if you are an active trader that has placed many buy and sell positions throughout the tax year.

    Read Also: How To Invest In Neo Cryptocurrency

    How Are Crypto Taxes Enforced

    The IRS doesnt say how it decides which tax returns to examine, but the assumption is that it will review information provided on a tax return such as the answer to the virtual currency question on Form 1040 or the information on a Form 8949.

    The IRS appears to pay close attention to individuals that received a Form 1099 from an exchange and will use its computer system to check the Form 1099 information against what a taxpayer reports on their tax return.

    Notably, if a taxpayer answers No to the virtual currency question, or doesnt include a Form 8949, and is issued a Form 1099 from an exchange, that taxpayer is more likely to be audited the IRS now has information that may result in penalties on top of whatever additional tax may be owed. Honest answers are always recommended.

    TaxBit is experienced in resolving cryptocurrency audits. The IRS is actively sending taxpayers CP2000 notices where information shown on a Form 1099 didnt match what was reported on a tax return.

    Many cryptocurrency tax softwares will provide a taxpayer with tax forms, but offer no additional information about how gains and losses were calculated. Because of the lack of an audit trail, it can be difficult to adequately address the IRSs questions without a trusted provider. Learn more about responding to CP2000 notices in our article.

    How To Calculate Your Cryptocurrency Taxes Canada

    Calculating your crypto taxes so you can accurately report them to the CRA can take hours – if not days if you trade at volume! You can do it all manually, or you can use a crypto tax app like Koinly to save you hours.

    To calculate your crypto taxes manually, follow these steps:

  • Identify all your taxable crypto transactions for the financial year
  • Identify which transactions are subject to Income Tax and which transactions are subject to Capital Gains Tax.
  • Identify the cost basis for each transaction using the adjusted cost basis method.
  • Calculate your subsequent capital gains and losses, income and expenses.
  • Halve your net capital gain. Halve your net capital loss and subtract your new net capital loss from your net capital gain.
  • If you have a higher net capital loss than your net capital gain, remember you can carry capital losses forward to future tax years to offset against future gains.

    Recommended Reading: How Can I Get Bitcoins Fast

    Two Types Of Crypto Taxes: Capital Gain Vs Income

    As mentioned earlier, cryptocurrencies are taxable and in the United States, and there are two types:

  • Capital Gains Tax, similar to bonds, stocks, and other assets that qualify for capital gains.
  • Income Tax includes mining, staking, airdrops, and other related crypto activities from where one can earn income.
  • In the case of capital gains, the rates depend on the holding period and are classified as:

  • Short-term capital gains tax, taxes on assets that are held for less than a year. The rates are usually higher and range from 10% to 37%.
  • Long-term capital gains tax, taxes on assets that are held for a period longer than a year. The rates for long-term capital gains range from 0% to 20%.
  • Here is a list of activities that fall under capital gains tax vs. income tax.

    Cryptocurrency Mining As A Business

    How to pay ZERO TAXES on your Crypto Gains 2021 – Step By Step

    Business activities normally involve some regularity or a repetitive process over time. In some cases, one transaction can be considered a business activity.

    If you are still setting up or preparing to go into business, such as in cryptocurrency mining, you might not be considered to have started a business. You usually have to undertake significant activity that is part of your income-earning process. However, if you are mining as a business, you have to pay tax on your business income from the mining of the cryptocurrency and any capital gains on the sale of the cryptocurrency that you validated.

    Also Check: Which Cryptocurrency Will Rise The Most

    Is Crypto Interest Taxed

    As we discussed earlier, the interest generated from cryptocurrency investments is taxable in the UK. This will fall within the remit of your income tax liabilities for the respective financial year.

    It will be difficult for you to strategize in this respect especially if you are using a crypto savings account provider that automatically distributes interest payments on a daily or weekly basis.

    As such, you will need to report your crypto interest payments in the same way as any other taxable liability.

    Offset Capital Gains With Capital Losses

    Again, take away what you lost from what you made before they get their grubby little hands on it. This poses an interesting dilemma. The more you lose this year, the less you pay next year. If you do the math, youll find situations where you may as well burn a pile of money as give it to the revenue. In reality, you would probably donate it to charity, or bequeath it to your kids/family/friends, but the principle is the same.

    A tax accountant would traditionally make this calculation and offer appropriate solutions, but like everyone else, theyre being replaced by software. See below for details.

    Don’t Miss: Can I Transfer Bitcoin To My Bank Account

    How Cryptocurrency Is Taxed In The Us

    In our in-depth guide Cryptocurrency & Bitcoin Taxes: Complete Tax Guide 2022, we have explained all the tax rules surrounding bitcoin and cryptocurrency in the US in great detail. The short summary is that if you are reporting and paying taxes in the US, you will need to report your capital gains transactions on Form 8949 and Schedule D every year.

    Cryptocurrency is considered property for taxation purposes in most countries today, including the US. This means that if the price of a cryptocurrency you have bought appreciates in value before you sell it, you will need to pay capital gains tax. You must calculate the initial purchase cost and proceeds value for every transaction before working out the gain/loss for all taxable events during the tax year. Generally speaking, all transactions where any coins or tokens are disposed of are considered taxable events. This includes also every crypto-to-crypto trade, if you have swapped tokens on a DEX like Uniswap, or if you have traded futures on a derivatives exchange.

    To complicate things even more, there are special tax rules for mining, staking, airdrops, DeFi, and NFTs. It is therefore very easy to get lost when it comes to crypto tax reporting, which is why most investors and traders prefer to use a cryptocurrency tax tool to help them generate all the required tax forms and reports.

    Lets now dive into how you can actually reduce or avoid paying taxes on your cryptocurrency gains legally!

    Popular news
    Related news