How To Report Your Taxes on Crypto

Crypto Taxes

During 2021, the cryptocurrency market flourished. Bitcoin trades and other Cryptocurrency-related activities may significantly affect your taxes if you’re one of the approximate 10% of Americans who traded Crypto last year.

The Internal Revenue Service (IRS) and state tax authorities should be notified of any cryptocurrency transactions, with each transaction potentially resulting in a separate tax bill for U.S. residents. In this section, you’ll learn how and when your Crypto is taxed and how you may be able to lower your tax cost.

First, you must know that INX is not an accounting firm and does NOT supply any tax guidance/ advice. This article reflects our views on IRS guidelines, which may grow and transform over time. This should not be interpreted as guidance or a recommendation for anybody. We must, however, ensure that our users always have access to the most current and pertinent information. Please confer with your specific tax specialist regarding your tax circumstances.

Reporting Crypto Taxes

Before making a cryptocurrency investment, potential buyers must understand the industry’s tax functions. The categorization of cryptocurrencies differs from governmental agency to federal agency, so investors should be aware of this.

Taxpayers and companies may now turn to the IRS for information on how the government addresses cryptocurrency taxes. This notification used the term “virtual currency” to describe cryptocurrencies. According to the IRS, cryptocurrencies are not considered cash for federal tax purposes. Instead, the transactions of cryptocurrencies are recognized as capital assets, like bonds, stocks, and other financial instruments. As a result, everyone who sells or receives payment in cryptocurrency may be subject to paying taxes.

There is a lack of uniformity in the federal government’s treatment of cryptocurrencies as property for tax reasons.

How is Cryptocurrency Taxed?

One might not realize that investors must pay taxes on cryptocurrency gains. The Internal Revenue Service (IRS) in the United States treats cryptocurrency as a capital asset. Depending on how long you hold onto your Crypto profits, you may owe taxes on some or all of it, either as capital gains or income.

To determine whether you owe taxes, consider how you spent your cryptocurrencies. Let’s take a closer look:

Not taxable 

  • Buying cryptocurrency using fiat currency and keeping it: Cryptocurrency purchases and holdings are not taxed. You’ll owe tax on the profit you realize from selling your home.
  • A tax-deductible donation of cryptocurrency to a recognized nonprofit or charity.
  • The only time you may be taxed on your Crypto is if you sell it or engage in a taxable action like staking. 
  • Isn’t it wonderful when someone gives you something? You are exempt from paying taxes on gifts up to a yearly maximum of $15,000 (and more elevated amounts to partners). A gift tax return is required if the present value to each recipient surpasses $15,000 per year (which typically does not stem from any present tax liability). Even if you didn’t intend it, a cryptocurrency transfer to someone other than to pay for interests or services might be considered a gift.
  • Cryptocurrency transfer: If you move Cryptocurrencies between wallets or accounts you own, you will not be taxed on it. A cost basis and acquisition date may be moved to keep track of your prospective tax consequences when you sell.

Taxable as capital gains

  • When you traded your cryptocurrency, how much money did you obtain in US dollars? If you sell your assets after a holding period of one year and the sale of those assets is greater than your original cost basis, the net profit is considered capital gains. Selling at a loss can offset qualified capital gains.
  • When buying ether using bitcoin, you must first sell your bitcoins to fund the purchase of your new ether. The IRS sees this as a taxable transaction since it is a deal. If you trade your bitcoin for a profit, you would owe taxes.

Taxable as revenue

  • There are potential penalties for failing to report any cryptocurrency-related income to the Internal Revenue Service (IRS).
  • If you were to mine cryptocurrency, you’d have to pay taxes on your profits depending on the mined coins’ fair market worth (typically the price) when you got them. As a firm, mining cryptocurrency is taxed as a kind of self-employment tax.
  • When you earn staking rewards, in the same way as mining profits are taxed, these profits are taxed at their current fair market value.
  • It is possible to make money by investing in some cryptocurrencies. This is a taxable benefit. The IRS does not recognize this as interest, even though it is often referred to as such.
  • To get your hands on cryptocurrencies, hard forks are an option: Forks may affect taxes in various ways, which relies on how you utilize the bitcoin after it has been removed and other circumstances.
  • Being the recipient of an airdrop: Cryptocurrency companies may provide airdrops with a promotional effort. You must include the funds in your taxable income if you receive an airdrop. Take a look at the most recent IRS airdrop advice.
  • Receiving additional benefits or incentives: This isn’t an exhaustive list; there are many more ways to get free Crypto. If you recommend someone to a crypto exchange, you may get $5 in bitcoin as payment. In any case, you must declare them as a source of income.

Day Trading Taxes

Long-term investments have a lower tax rate than short-term investments, which might be confusing to folks who aren’t familiar with the financial markets. A lower tax rate is given to long-term investments than to short-term investments, which are taxed at the standard income rate.

The table below provides a detailed analysis of each rate. IRS 2021 tax rules

Gross Annual Income Long-Term Tax Rate Regular Tax Rate
Up to $9,325 0% 10%
$9,326-$37,950 0% 15%
$37,951-$91,900 15% 25%
$91,901-$191,650 15% 28%
$191,650-$416,700 15% 33%
$416,700-$418,400 15% 35%
$418,401 + 20% 39.6%

Pleasing news for holders

As long as you’re holding the Crypto, you won’t be taxed on it. It is only when you market the asset for fiat money or another cryptocurrency that you are required to pay taxes: Having “realized” the earnings, you must pay taxes on them now.

Compiling cryptocurrency earnings

Federal and state income taxes are typically removed from your paychecks in the United States. In addition, you’ll have to pay taxes on any cryptocurrency earnings you make (such as from staking, mining, and awards). In most circumstances, when you submit your taxes, you will owe income tax at a rate determined by your tax bracket. Regarding taxation, it’s important to remember that your tax bracket might change based on how much money you’ve gained in the cryptocurrency market.

Federal income tax information may be found at IRS.gov.

Calculating capital gains and losses

Your initial crypto holdings are an essential determinant of your earnings and losses, mentioned as a cost basis.

Tracking where your money comes from is a vital life skill. The price you spend for a cryptocurrency affects your tax basis. On the other hand, one’s cost basis is  established on the cryptocurrency’s fair market value at the time you purchased it, regardless of how you earned it. When you get cryptocurrency as a gift, the cost basis is determined by the individual who gave it to you and the current market value. When you trade your bitcoin, you’ll have to subtract the cost from the sales price to determine if you’ve made any money. If the selling price exceeds the cost of the products sold, a profit has been made. 

Investing for the long term versus the short term

Federal and state governments impose taxes on capital gains when investing for the long term versus the short term. You may owe more or fewer taxes based on the time you’ve put in your Crypto. Those who hold onto their cryptocurrency for longer than a year will likely pay a lower tax rate than if they sell it right away.

  • Taxes on long-term earnings have been reduced. As a result of your income, these rates may vary from 0%, 15%, or 20% at the federal level. Taxes on net investment income might also be levied on the incomes of higher-earning individuals.
  • Because of the individual’s average tax rate, short-term capital gains are usually taxed at a higher and less advantageous rate than long-term capital gains.

It’s important to remember that taxable events usually occur when you suffer losses or gains, indicating you’ve traded your Crypto by either exchanging it for another currency, selling for cash, or using it to purchase goods or services. Profits are not recorded if you still hold the initial shares.

Acknowledging your financial setbacks

You’ve incurred a financial failure when you traded an item at a lower price than you spent. Even if you have a setback, you may still benefit from it and go on. You might pay less in taxes yearly if you use your losses as a dollar-for-dollar credit against other capital gains.

A deduction of up to $3,000 per year is allowed if your losses surpass your earnings or if you have no income. Once a failure is calculated, any remaining funds are carried over to the following year’s budget.

How Much Do I Owe in Crypto Taxes?

Investors’ income, tax filing status, and the time they held Crypto before selling all influence how many crypto taxes they owe. Individuals’ tax rates are also affected by the sort of bitcoin transaction they make. Depending on the circumstances, capital gains may be taxed at a higher rate than ordinary income.

The long-term capital gains tax rate applies if an investor has possessed a cryptocurrency for more than 365 days before selling or utilizing it. For the 2021 tax year (taxes due in 2022), the following are the long-term cryptocurrency gain tax rates:

Capital Gains Taxes for 2021 Long-Term

Tax Rate Single Married Filing Together Married Filing Individually Head of Household
0% 0-40,400 USD 0-80,800 USD 0-40,400 USD 0-54,100 USD
15% 40,401-445,850 USD 80,801-501,600 USD 40,401-250,800 USD 54,101-473,750 USD
20% 445,800 USD 501,600 USD 250,800 USD 473,750 USD

Source: Internal Revenue Service

Gains from the sale or use of a cryptocurrency that an investor possessed for less than a year are subject to regular income tax. Individuals who got cryptocurrency as payment, mined it, or received it as part of an airdrop are subject to ordinary income tax. 

Tax rates for 2021 (taxes filed in 2022) are as follows:

Short-Term Capital Gains and Income Tax Rates for 2021

Tax Rate Single Married Filing Together Married Filing Individually Head of Household
10% 0-$9,950 USD 0-19,900 USD 0-9,950 USD 0-14,200 USD
12% 9,951-40,525 USD 19,901-81,050 USD 9,951-40,525 USD 14,201-54,200 USD
22% 40,526-86,375 USD 81,051-172,750 USD 40,526-86,375 USD 54,201-86,350 USD
24% 86,376-164,925 USD 172,751-329,850 USD 86,376-164,925 USD 86,351-164,900 USD
32% 164,926-209,425 USD 329,851-418,850 USD 164,926-209,425 USD 164,901-209,400 USD
35% 209,426-523,600 USD 418,851-628,300 USD 209,425-314,150 USD 209,401-523,600 USD
37% 523,600 USD 628,300 USD 314,150 USD 523,600 USD

Source: Internal Revenue Service

FAQ

Do you have to pay taxes on Crypto/ How to pay Tax on Crypto?

Yes, you have to pay tax on crypto. Your virtual money is taxed like any other asset, like stocks or gold, according to the IRS’ definition of “property” for tax purposes.

How many cryptos do you have to report on taxes?

Form 1040 asks taxpayers whether they engaged in transactions using a virtual currency throughout the year. More than 200 transactions and more than $20,000 in trading in a calendar year need filing a 1099-K by cryptocurrency exchanges.

How much tax do I pay if I sell Crypto?

Cryptocurrency purchases held less than a year are taxed at the same rates as all other income in 2022, ranging from 10 percent to 37 percent according to the federal income tax band in which you are now placed.

How much do I owe in crypto taxes?

Some of your crypto activities may be subject to taxation. Taxes may be estimated using income, profits, and losses.

How to Calculate Crypto Gains

Crypto gains are taxed as income or capital gains, depending on the length of the holding period.

OPEN ACCOUNT

INX is not an accountancy company and does NOT give any tax advice. This blog just represents our opinions on IRS standards, which may expand and evolve over time.

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