Time Sales With Your Tax Rate
If you have the luxury of time on your side, you can always try to wait out a lower tax rate, says Jeff Hoopes, an associate professor at the University of North Carolina and research director of the UNC Tax Center.
Perhaps you got laid off, retired, went back to school or moved to a lower tax state. Then you might find yourself in a lower tax bracket, which would allow you to sell your crypto while owing less in taxes, he says.
Bitcoin Taxes In : A Guide To Tax Rules For Cryptocurrency
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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 how using bitcoin can affect your taxes:
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.
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You Need To Keep Detailed Records Of All Your Crypto Assets For Your Taxes
You need to document your crypto transactions for tax purposes. Tax software can collect your data and calculate your crypto tax automatically, greatly simplifying the tax process.
Additionally, for any given tax year, your crypto tax liability calculations may be based on holdings acquired in past years. It is therefore important to keep documentation backing up your crypto tax liability for all years until you close out all positions, as you will need it to prove how much you initially paid for your crypto.
Just like any other tax situation, you should keep backup records in case you are audited and need to prove your tax positions to the IRS. It can be difficult to compile your transactions if you traded on exchanges that closed during the tax year, so backing up your transaction data is highly recommended.
Capital Gain Tax Events
Here are the short-term capital gain and long-term capital cryptocurrency gain tax events in which the cryptocurrency tax rates as of 2021 apply:
For example, you buy 2 ETH for $1,000 and then sell them for $700 a few months later. The capital loss of $300 will get deducted and reduce your taxable income.
For example, you bought 5 bitcoins in a bitcoin transaction for $150 each pre-2014. Now thanks to your newfound wealth, you use 1 bitcoin to buy a brand new Harley-Davidson for $56,000. At the time of buying the bike, 1 bitcoin is worth $56,000.
In this example, you incur a taxable event when you dispose of your bitcoin for the Harley-Davidson . As a result, you incur a capital gain of $55,850 and need to report it on your taxes.
This can be done either directly peer-to-peer or on an exchange.
Here is an example: you bought 10 Litecoin for $500. After a few months, you traded all of your Litecoin for 1 ETH . When you made the trade, 10 Litecoin were worth $3,000.
Here, you incurred a capital gain of $2,500 from trading your Litecoin for Ethereum and will thus need to report it on your taxes.
Its important to note that if you were just transferring an asset from one exchange or wallet to another, that is not a taxable event as it does not trigger any capital gains or losses.
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How Do You Avoid Tax On Crypto
All US citizens must pay tax on their capital gains and cryptocurrency is no exception. No matter where you live, you must pay US tax on your trading profits. Failure to do so can result in a huge fine and even a prison sentence. So is it legally possible to dodge tax and if yes, how do you avoid tax on crypto?
You can give up your US citizenship to avoid tax on crypto. To do this, you typically need to pay an exit tax fee and have a second passport on standby. Without a second passport, you cant expatriate from the United States.
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.
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How Do You Report Crypto On Your Taxes
If youâre like 90% of other cryptocurrency investors, you likely have only bought, sold, and traded crypto via a cryptocurrency exchange. This crypto income is considered capital gains income and is reported as such.
On the other hand, if you earned cryptocurrencyâwhether that’s from a job, mining, staking or earning interest rewardsâthat earned income is generally treated as ordinary income and is reported as such.
We dive into the reporting for each of these income types below.
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 Do Capital Gains Taxes Work
If you’re buying and selling cryptocurrencies, you’ll pay capital gains taxes on the profits. However, the tax rate depends on your taxable income and whether you held on to the cryptocurrency for at least a year.
When you buy and sell cryptocurrencies within a year, the short-term gains are taxed as ordinary income. However, if you hold on to your cryptocurrency for a year or more, you’ll pay long-term capital gainswhich may be beneficial.
The income limits and tax rates can depend on your filing status, and may change from one year to the next. Here are the tax rates for single taxpayers for the 2021 tax year.
|2021 Capital Gains Tax Rates for Single Filers|
|Sold Within One Year|
Revenue Secretary Tarun Bajaj Said That In Terms Of Income Tax Some People Are Already Paying Capital Gains Tax On The Income From Cryptocurrency And In Respect Of Goods And Services Tax Also The Law Is Very Clear That The Rate Would Be Applicable As Those In Case Of Other Services
Centre to change tax laws in Budget to tax cryptocurrency gains
The government is mulling changes in the income tax laws to bring cryptocurrencies under the tax net, with some changes that could form part of the Budget next year, a top official said.
Revenue Secretary Tarun Bajaj said that in terms of income tax, some people are already paying capital gains tax on the income from cryptocurrency, and in respect of Goods and Services Tax also the law is “very clear” that the rate would be applicable as those in case of other services.
“We will take a call. I understand that already people are paying taxes on it. Now that it has really grown a lot, we will see whether we can actually bring in some changes in law position or not. But that would be a Budget activity. We are already nearing the Budget, we have to look at that point of time,” Bajaj told PTI in an interview.
Asked if a provision of TCS could be introduced for crypto trading, the Secretary said “if we come up with a new law then we will see what is to be done”.
“But yes, if you make money you have to pay taxes… We have already got some taxes, some have treated it as an asset and paid capital gains tax on it,” he said.
“They have to get themselves registered. The GST law is very clear. If there is an activity, if there is a broker who is helping people and charging brokerage fee, GST would get charged,” he said.
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Why Crypto Exchanges Can’t Provide Accurate Tax Forms
This is where a big problem exists within the crypto tax space.
Cryptocurrency exchanges like Coinbase, Binance, and others do not have the ability to provide their users with accurate capital gains and losses tax reports. This is not a fault of the cryptocurrency exchange itself, it is simply a product of the unique characteristics of cryptocurrenciesânamely their transferability.
Because users are constantly transferring crypto into and out of exchanges, the exchange has no way of knowing how, when, where, or at what cost basis you originally acquired your cryptocurrencies. The exchange only sees when crypto appears in your wallet.
The second you transfer crypto into or out of an exchange, that exchange loses the ability to give you an accurate report detailing the cost basis and fair market value of your cryptocurrencies, both of which are mandatory components for tax reporting.
As you can see pictured below, Coinbase themselves explains to their users how their generated tax reports wonât be accurate if any of the below scenarios took place. This affects over two thirds of Coinbase users, which amounts to millions of people.
You can read more about the âcrypto tax problemâ in our blog post: Why Exchanges Canât Report Crypto Taxes.
What If I Spent My Bitcoin At A Retailer That Accepts Cryptocurrency
Spending your bitcoin isn’t all that different from selling it in the eyes of the IRS, especially if your holding has greatly increased in value since you first purchased it. The IRS website states that “the use of virtual currencies to pay for goods or services . . . generally has tax consequences that could result in tax liability.”
If you purchased one bitcoin for $3,000 last March and then used the same coin now worth more than $50,000 to pay for a Tesla this week, you have to report capital gains on the transaction.
“What you’ve got there is a $47,000 capital gain,” Losi explains. “The IRS is going to look at what the fair value of the coin is at the date of exchange and compare that to your tax basis, which is the date at which the bitcoin was acquired.”
That means that unless you earn less than $40,000 a year, you can expect a tax hit on any item you purchased with your crypto.
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What Are The Tax Implications Of Donating Gifting Or Inheriting Cryptocurrencies
Cryptocurrency donations are treated in a similar fashion as cash donations. They are tax-deductible. An appraiser will assign a fair market value for the coin based on its market price at that time. The donor is not required to pay any taxes on the price gain. Gifts of cryptocurrency below $15,000 are not subject to income. If the recipient of a crypto gift over $15,000 decides to sell the gift, then their cost basis remains the same as that of the donor. Inherited crypto assets are treated the same way as other assets, meaning they are subject to the same estate regulations as other assets.
Calculate Gains And Losses With Crypto Tax Software
The easiest way to calculate your capital gains and losses is using crypto tax software. Crypto tax software is integrated with major crypto exchanges, blockchains, and wallets, and can help you with reporting and filing your crypto taxes.
At ZenLedger, you can use our crypto tax calculation software to simplify tax reporting and financial analysis in compliance with the IRS and the SEC rules and regulations.
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Inherited Cryptocurrency Is Treated Like Other Inherited Assets
Inherited cryptocurrency is treated like other capital assets that are passed from one generation to another. They may be subject to estate taxes if the estate exceeds certain thresholds .
Like stock, cryptocurrency enjoys a stepped-up cost basis to the fair value on the day of death. So generally, cryptocurrency is treated for most people like a typical capital asset, says Harris.
Are There Taxes On Bitcoins
More than a decade after Bitcoins introduction, there is still considerable confusion about its taxes. The cryptocurrency was conceived of as a medium for daily transactions but it has yet to gain traction as a currency. Meanwhile, it has become popular with speculators and traders interested in making a quick buck off its volatility.
The Internal Revenue Service addressed cryptocurrency transactions in its notice 2014-21. The agency stated that cryptocurrencies would be treated as an asset similar to property. In 2019, the IRS began including a question on its Form 1040 to determine whether the tax payer had any cryptocurrency transactions during the given tax year.
Depending on the type of transaction, assets are subject to various kinds of taxes. But the unique characteristics and use cases for Bitcoin means that there are several exceptions.
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Tax Tips For Bitcoin And Virtual Currency
Virtual currency like Bitcoin has shifted into the public eye in recent years. Some employees are paid with Bitcoin, more than a few retailers accept Bitcoin as payment, and others hold the e-currency as a capital asset. Recently, the Internal Revenue Service clarified the tax treatment of virtual currency transactions.
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.
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Are Cryptocurrency Airdrops And Forks Taxable
The tax treatment of airdrops and forks has been ambiguous. While the Internal Revenue Service finally issued new cryptocurrency tax guidance last year, the new guidance still left many questions unanswered.
The new guidance said that new cryptocurrency created from a hard fork of an existing blockchain or an airdrop should be treated as ordinary income equal to the fair market value of the new cryptocurrency when it was received. The tax liability exists even if the new cryptocurrency is unwanted by the recipient â if you received it, you owe tax on it.
While most forks don’t start out with a high valuation, it’s possible for someone to maliciously fork or airdrop tokens and leave you with a large tax liability. Depending on the tokens trade, you could end up paying tax on cryptocurrency that was worth more when you received it than when you sold it. These are distinct possibilities when it comes to splinter currencies.