You never thought you’d see it, but we now have a mix of cryptocurrency and taxes. As more countries adopt this digital asset, it’s no surprise that taxes will follow. In response, every crypto investor should know how much they owe and pay on time.
We’ll start with the two different ways the United States taxes cryptocurrency transactions. Next, we will go through the steps of filing tax returns. Then, we’ll provide more tips regarding cryptocurrency and taxes.
This article can help those inside and outside the crypto market. If you’re an investor, you’ll learn how to deal with the changes coming to your assets. If you’re planning to invest, this will guide you through the first steps of your investment journey.
Table of Contents
How does the US deal with cryptocurrency and taxes?
Americans now have to pay taxes for their bitcoin and altcoins. If you live in the US, you must report all the transactions and income you made from cryptocurrency.
How does the IRS impose taxes on cryptos? It sees this asset as a source of income and a capital asset. This depends on what you do with your digital assets.
Why are cryptos treated this way? Well, you have different ways you can earn income from them. This includes mining and selling cryptocurrencies.
On the other hand, it’s similar to shares of a company’s stock. If you’re an investor, you’ve experienced waiting for your coins to go up in value!
As a result, your taxes are divided into these categories. Each one corresponds to actions you take with your cryptocurrencies. Let’s go through these taxable events below:
Crypto taxes as a source of income
- Selling coins for cash – It’s becoming easier to turn cryptos into cash, especially because of bitcoin ATMs. When people do so, they gain taxable income. However, you can include losses in your tax bill.
- Buying stuff – It’s easier to pay for goods and services with bitcoin nowadays. You will also need to pay taxes for all the times you did that.
- Crypto-to-crypto exchange – The crypto market has various trading pairs such as ADA/BTC. Let’s say your ADA coins went up in value. You could use those to buy more bitcoin. Afterward, you’ll have to pay tax.
- Mining cryptos – You can have your computer get more cryptos while you sleep. This is called mining, and it helps crypto networks function. The coins you get are taxable.
- Crypto as payment or airdrop – People are starting to earn salaries in cryptos, such as the Sacramento Kings NBA team members. On the other hand, initial coin offerings (ICOs) may hold airdrop giveaways as a promotion. Either way, you’ll have to pay taxes too.
- Crypto rewards – This includes earnings from staking and interest.
Crypto taxes as a capital asset
We mentioned that cryptos are like stocks. In the United States, stock investors pay taxes based on how long they’ve held their assets. They’re divided into two categories.
Capital gains taxes can either be short-term or long-term. You need to understand each so you can pay properly. Let’s look at both types below:
- Short-term capital gains – You pay these if you’ve only had your cryptos for less than a year. You may deduct up to $3,000 worth of losses to your taxes. Let’s say your losses are worth $3,500. You’ll carry over the remaining $500 for the next tax year.
- Long-term capital gains – If you’ve held your coins longer than a year, you’ll have to pay these instead. You’ll owe taxes of up to 0% to 20% depending on your individual or mixed marital income.
If you’d like to know more about capital gains and losses, click this link. You may check your corresponding tax rate there as well.
Non-taxable crypto actions
Cryptocurrency and taxes don’t always have to follow each other. You won’t have to pay when performing the following actions:
- Donating cryptos – Bitcoin and other coins are making donations easier. If you gave some to a qualified tax-exempt charity or non-profit, that’s
- HODLing coins – HODL means “hold on for dear life,” a well-known crypto investment strategy. It involves buying cryptos and simply not touching them no matter how low the prices get. What’s more, you will not need to pay taxes from doing this.
- Wallet-to-wallet transfers – If your cryptos are in a digital wallet, you may move it to another without paying taxes. However, you still have to check if that’s how your chosen wallets work.
- Coinbase transfers – You will not need to pay taxes when transferring cryptos between two Coinbase accounts. That’s also the case when sending your wallet coins to a Coinbase account. If you’re using other crypto exchanges, please check them for more taxation details.
Make sure you declare such actions properly. Comply with the IRS requirements, so the deductions are counted. More importantly, this will help you avoid penalties.
How do I prepare for the crypto tax season?
- Track your crypto activity – The IRS requires all crypto holders to keep an accurate record of their transactions. Thankfully, many crypto exchanges have a built-in tool to help you file taxes. Two months ago, Binance launched its tax reporting tool API.
- Calculate gains and losses – Specifically, you must compute for your cost basis. It’s the fair market value of your digital currency added with the profits you made when you sold them. You may find plenty of online tools to help you. What’s more, the IRS Virtual Currency FAQ page can help you.
- Form 8949 and Form Schedule D – The former is the specific document for reporting crypto capital gains and losses. Meanwhile, the latter is for reporting capital gains and losses from all sources. Cryptos earned as income should be added to Schedule 1 Form 1040. On the other hand, include self-employed crypto earnings in Schedule C.
- Submit forms and pay on time – It’s just like every other tax!
Is there anything else I should note?
What does it mean? If you live in the United States, cryptocurrency and taxes may change soon. You may have to deal with “third-party reporting” soon.
It’s when another person or group submits your tax liability details. Studies found that people are more likely to pay taxes if they know someone else is reporting their income.
Americans may see other changes as well. This includes reporting when you moved your coins out of an exchange. Another involves reporting when you’ve spent more than $10,000 in crypto.
Keep up-to-date with potential crypto tax revisions. These aren’t final yet. The House still needs to approve all these. Still, it’s best to prepare for such changes should they happen.
Moreover, the rules we tackled were from the federal government. Your state may have different laws on crypto. Please ask your local government for more information.
You’ll see more differences if you live outside the United States. For example, tax brackets for cryptos are different in Japan. Check your country’s laws for more details.
The mix of cryptocurrency and taxes shouldn’t stop you from investing. Other assets like bonds, stocks, and real estate have taxes too. It’s just natural for all investors.
What’s more, it just proves that cryptos are truly changing the world. Their impact is so widespread that governments are starting to notice. This proves cryptos are true assets!
This should spur you to start investing. Of course, you should arm yourself with accurate information beforehand. You may start with other crypto articles from Inquirer USA.
Most importantly, understand the taxes involved. Submit the right documents and pay on time. This will help you avoid penalties and other hassles.
Learn more about cryptocurrency and taxes
Do you pay taxes on cryptocurrency?
Many countries now have taxes on cryptocurrency. In the US, it is taxed as income and a capital asset. Please check the rules that apply in your area.
Can cryptocurrency be converted to cash?
Yes, you may turn your cryptos to cash. It’s a lot easier to do it nowadays. For example, bitcoin ATMs make it easier for people in the United States.
Do you have to report crypto on taxes if you don’t sell?
You won’t have to pay taxes for crypto in the US if you’re just holding them. This may change depending on your state, though. Taxes are also different if you’re from another country.