How are cryptocurrencies taxed?
Do I pay taxes on cryptocurrency? We receive this common question, and it’s essential to understand its rules. Unlike traditional securities, cryptocurrencies are considered property by the IRS. You must report transactions in US dollars and determine the fair market value on the day of the transaction. These include the timeframe required to report your gains and losses, the number of taxable crypto disposals, and the tax rate.
If you are selling your crypto-currency for a profit, you will owe capital gains taxes based on the length of time you held it. The first step in figuring out your tax liability on crypto is to compare your net proceeds with your cost basis and the length of time you hold the crypto asset.
Calculating the basis, profits, and losses is incredibly cumbersome and expensive for investors in digital assets. Until now, most cryptocurrency exchanges haven’t provided 1099 or more information reporting forms that accurately report gains and losses from transactions entered into in a given year. Lesser-known exchanges keep poor transaction logs. It’s a good idea to keep detailed records for your investments, as this will help you calculate your capital gains when tax time rolls around.
Short Term Vs Long-Term Gains
If there’s a profit on assets held for less than one year, it’s a short-term gain, subject to regular marginal tax rates from 10% to 37% for 2021. Long-term capital gains are defined as holding the security for more than one year, having a tax that reaches a maximum of 20%, and is likely less if you are not in the highest tax brackets.
Those who mine cryptocurrency must report these payments as income. You owe tax on the entire fair market value of the crypto on the day you receive it, at your ordinary income tax rate. The IRS considers this amount to be the current value of the currency. If you earn cryptocurrency by mining it, receiving it as a promotion or payment for goods or services, it counts as part of your regular taxable income.
Taxes Regarding Staking Cryptocurrency
How are cryptocurrencies taxed in regards to staking? Staking is a way of earning additional rewards for holding cryptocurrency. A simple way to understand staking is to think of it as a bank account that accrues and earns interest; however, staking a cryptocurrency pays additional cryptocurrency and not dollars. A staking reward is taxable as ordinary income at its fair market value on the date you receive it. If you sell the crypto received as a staking reward at a later date, you’ll owe capital gains tax on any increase in value.
If multiple transactions occur and one experiences a loss greater than capital gains, capital losses and eliminate taxes owed for the tax period. For example, if there was purchased and sold for a loss of $6,000 and bitcoin was bought and sold for a gain of $6,000, there would not be a realized gain, and therefore taxes would not be collected. However, consult a tax professional to review your tax situation.
How are cryptocurrencies taxed when spending? Because the taxation rules for cryptocurrency are so complex, it’s essential to know how much you’re spending and how much you’re earning. This is especially true if you’re spending cryptocurrency on purchases. Many businesses are now accepting cryptocurrency for the payment of goods and services. While the transaction is not occurring on an exchange, the IRS considers this a sale of cryptocurrency, and the amount gained on crypto from the point of cost to the point of purchase will count as a capital gain.
Now, imagine if an automatic tool existed that could calculate all of your transactions and wallets in a matter of minutes. Cointracker.io, while we are not affiliated with them, does a great job at performing this immense task. It can connect to your cryptocurrency wallets and major exchanges to calculate taxes owed automatically. It is a powerful tool; however, we recommend using automated tools in conjunction with a professional and licensed tax preparer to prepare your taxes if you are a cryptocurrency trader.
Tips To Reduce Cryptocurrency Taxation
Two Tips to Reduce the Amount Owed in Taxes:
Hold Your Crypto For A Year Or More
Buy and Sell through an IRA or 401k, which are tax-advantaged accounts.
Have Questions? Contact Us!
Sharon Griffin has a reputation for on-point business strategy and economic literacy at SDG Business Consulting. SDG expanded the team to provide risk management analysis and economic leadership. Both SDG Financial Services and SDG Business Consulting are certified with the designations of Women-Owned Business Enterprise (WBE), Minority Business Enterprise (MBE), and Small Business Enterprise (SBE). These distinctions have paved the way for Sharon and her team to branch into the not-for-profit sector of education, focusing on providing people with a better understanding of the financial world and how it works.