Reporting Crypto Capital Gains And Losses
Your capital gains and losses from your crypto trades get reported onIRS Form 8949.
Form 8949 is the tax form that is used to report the sales and disposals of capital assets, including cryptocurrency. Other capital assets include things like stocks and bonds.
To fill out Form 8949, list all of your cryptocurrency trades, sells, and disposals onto Form 8949 along with the date you acquired the crypto, the date sold or traded, your proceeds , your cost basis, and your gain or loss for the trade.
Once you have each trade listed, total them up and fill in your net capital gain or loss for the year at the bottom.
For a detailed walkthrough of filling out Form 8949, checkout this blog post: How To Report Cryptocurrency to the IRS with Form 8949.
What Is The Cryptocurrency Tax Rate
The cryptocurrency tax rate for federal taxes is the same as the capital gains tax rate. In 2021, it ranges from 10-37% for short-term capital gains and 0-20% for long-term capital gains. In the US, crypto-asset gains are calculated using two factors: your income, and how long you have held the cryptocurrency .
Your holding period begins the day after you purchase the crypto asset or make the cryptocurrency transaction and continues until the day that you trade/sell/send that capital asset. This is where short-term capital gains and long-term capital gains come in.
Short term capital gains and their tax rate: If your cryptocurrency coins have a holding period of 365 days or less, they will be taxed as ordinary income, and will be subject to short-term capital gains tax.
Here are the 2021 short term tax rates as released by the IRS earlier this tax year:
Long term capital gains and their tax rate: Coins with a holding period of more than 366 days are subject to long-term capital gains tax rates. These are tax liabilities between 0-20% and are based on what your ordinary income tax rate is.
Anytime a taxable event affects your cryptocurrency investments, you are obligated to report these on your taxes. What constitutes a taxable event? Any event in which you realize or trigger profits.
What Are My Cryptocurrency Tax Rates
Your income from crypto transactions will be taxed as short-term gains if you held the asset for a year or less before disposing of it. The federal tax rate for short-term gains 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.
However, if your asset could be considered a collectible, you may be liable for the higher 28% collectibles capital gains tax rate.
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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.
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.
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Bitcoins Held As Capital Assets Are Taxed As Property
If Bitcoin is held as a capital asset, you must treat them as property for tax purposes. General tax principles applicable to property transactions apply. Like stocks or bonds, any gain or loss from the sale or exchange of the asset is taxed as a capital gain or loss. Otherwise, the investor realizes ordinary gain or loss on an exchange.
Calculating Taxes When You Buy And Sell Cryptocurrency
When you buy and sell cryptocurrency, comparing your net proceeds to your cost basis isn’t the only step in figuring how much you owe in crypto taxes. You also need to consider the length of time you held the asset, as this determines the type of capital gain or loss you recognize. Depending on how long you hold your cryptocurrency, your gains or losses will be considered “short-term” or “long-term.” That distinction will play a big role in how much you have to pay in crypto taxes.
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Take Deductions For Mining Cryptocurrency
If you set up a business for the cryptocurrency that you mine, you can and should take tax deductions. Some of the common deductions include:
- Equipment costs
- Electricity costs
- Equipment repair
- Rented space
You can save quite a bit of money if you set up a business for your crypto mining. However, be aware that you will be subject to self-employment tax as well if you decide to do this.
With April 15 On The Horizon It’s A Good Idea To Start Getting Your Crypto Taxes In Order
Crypto tax season is fast approaching. With so many investors entering the crypto market the past year, that means dealing with a new asset class on their taxes. And even for seasoned investors, the regulatory landscape changes all the time. Heres what you need to know about filing crypto taxes for 2020.
The U.S. Internal Revenue Service in 2014 bitcoin and other cryptocurrencies should be treated as property, meaning they qualify for capital gains treatment similar to traditional assets like stocks and bonds. There are, however, some instances where certain activities involving digital assets are treated as income and therefore subject to income tax.
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The Importance Of Working With A Boston Tax Lawyer Who Can Provide Cryptocurrency Tax Assistance
With these types of issues in mind and understanding the potentially-substantial tax, interest and penalty obligations that come with failing to timely report cryptocurrency transactions most cryptocurrency investors will benefit greatly from the assistance of an experienced tax lawyer. This is true with regard to prospectively addressing tax reporting issues, retrospectively amending incomplete tax returns, responding to IRS warning letters, and defending against audits and investigations.
An experienced tax lawyer will be able to help you with cryptocurrency-related tax compliance in numerous respects, including:
- Determining which of your cryptocurrency transactions qualify as taxable events that need to be reported to the IRS
- Determining whether you have any local, state or international tax obligations related to your cryptocurrency investments
- Assessing your potential exposure and executing an effective strategy with regard to disclosing previously-unreported cryptocurrency transactions
- Filing all necessary new and amended tax returns
- Representing you in direct communications with the IRS and other tax authorities, including during tax audits and criminal tax investigations
- Negotiating offers in compromise and deferred prosecution agreements
- Developing tax strategies for avoiding future issues at the state, federal and international levels
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.
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Irs Crypto Warning Letters
As part of the Virtual Currency Compliance campaign, the IRS sent thousands of warning letters to suspicious traders last year. Some of the letters only provided educational information to warn virtual currency holders that they potentially underreported their earnings. The less-threatening letters encouraged individuals to file an amended tax return. However, Letter 6173 asked for a response within 30 days.
Then there was CP 2000. This letter directly warned that the individuals income didnt match IRS records. These letters listed the discrepancy and applicable interest. If you received Letter CP2000, dont ignore it. You have to take action.
You can either verify the amount owed, remit your payment, or file a response that proposes your version of the discrepancy. If you dispute the total, you also need to supply supporting documentation to prove your numbers are correct.
Q: How Do I Account For Cryptocurrency Gains
As we discussed above, accounting for cryptocurrency gains is one of the biggest challenges many investors face when it comes to tax reporting and compliance. As a general rule, cryptocurrency investors should maintain transaction logs that are as detailed as possible and, once again, it is advisable to seek advice from an attorney with specific experience in this area.
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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.
Hold Cryptocurrency For The Long
If you hold a crypto investment for at least one year before selling, your gains qualify for the preferential long-term capital gains rate. Depending on how much money you make in a year, this can almost halve your tax rate, going from a maximum rate of 37% for short-term gains to a maximum rate of just 20% for long-term gains.
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The Crypto Tax Reporting Solution
The solution to the crypto tax problem hinges on aggregating all of your cryptocurrency data that makes up your buys, sells, trades, air drops, forks, mined coins, exchanges, swaps, and received cryptocurrencies into one platform so that you can build out an accurate tax profile containing all of your transaction data.
Once all of your transactions are in one spot, youâll be able to calculate cost basis, fair market values, gains/losses, and income for all of your investing activity.
You can aggregate all of your transaction history by hand by pulling together your transactions from each of your exchanges and wallets. Or you can avoid the manual work and automate this process with the use of crypto tax software.
Can I Deduct My Cryptocurrency Trading Losses
Yes, you can. If you made a loss on your crypto trades you can deduct it from any profits you made during the year. If your losses exceed your gains then you can even offset upto $3000 worth of ordinary income and carry over all remaining capital losses to future years!
Keep in mind that you can deduct any kind of capital loss from your capital gains, let’s say you made $100,000 when you sold your house but also incurred $30,000 in losses from crypto trading during the same tax year. You would only pay a capital gains tax on the remaining $70,000.
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How Does The Irs Know About Your Crypto
The IRS uses a variety of tactics to detect cryptocurrency investments and unreported income. The most predominant of which is the 1099 reporting system.
Major exchanges like Coinbase, Gemini, Uphold, Kraken, and others report certain customer activity to the IRS using form 1099-K and/or other related 1099âs. These 1099âs all serve the same general purpose: to report non-employment related income to the IRS.
Both you and the IRS get sent a copy of these forms at year-end.
If the IRS receives a 1099 from your crypto exchange but sees no cryptocurrency income reported on your taxes, your account will be flagged and an automated CP2000 letterwill be sent alerting you of your non-reported income and tax liability.
You can learn more about how 1099-K works for your crypto exchange activity here.
Outside of 1099 reporting, the IRS works with blockchain analytics companies like Chainalysis to track cryptocurrency movements directly on-chain. Since 2015, the IRS has spent more than 10 million dollars on Chainalysis contracts. They use this data to identify tax fraud and money laundering.
How Are Hard Forks Taxed
If a certain cryptocurrency that you are holding goes through a hard fork which âoccurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger,â the new forked cryptocurrency you receive is taxed as income.
Your cost basis in the newly received cryptocurrency becomes the income you recognize.
Megan held 2.5 Bitcoin in July of 2017 and received 2.5 Bitcoin Cash as a result of the bitcoin cash hard fork.
Megan recognizes income at the fair market value of the bitcoin cash at the time it was received. If Bitcoin Cash was trading for $500/BCH that day, Megan would recognize income of $1,250 . Meganâs cost basis in this Bitcoin Cash becomes $1,250.
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Interest From Defi / Lending / Staking / Masternodes
Receiving interest from DeFi is also taxed in much the same way as mining. You have to declare it on your Income tax statement as additional ordinary income.
The actual “lending” of coins is not taxed as you still own the assets and haven’t disposed them yet. Note that guidance on this is not very clear, some countries such as Sweden are taxing the actual Lending transaction as a disposal. The IRS may also change its stance in the future and tax crypto lending as a disposal but – as of now – there are no indications of this happening.
What Is A Disposition
This refers to the way you get rid of something, such as by giving, selling or transferring it. In general, possessing or holding a cryptocurrency is not taxable. But there could be tax consequences when you do any of the following:
- sell or make a gift of cryptocurrency
- trade or exchange cryptocurrency, including disposing of one cryptocurrency to get another cryptocurrency
- convert cryptocurrency to government-issued currency, such as Canadian dollars
- use cryptocurrency to buy goods or services
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Q: In Which Jurisdictions Must You File Tax Returns Related To Cryptocurrency
As a U.S. citizen or U.S. resident, you are subject to federal income tax on worldwide income from all sources. If you live in a state that has income tax, you may also need to file in your state and, due to the global nature of cryptocurrency, you may have international tax filing obligations as well.