Have you been investing in cryptocurrencies for a while now? Are you planning to leverage the market rates for a quick buck? If yes, pause for a while and know that all your crypto transactions can impact your tax bill. Yes, you heard that right; your gains from cryptocurrencies are taxable.
The market value of digital assets topped $2 trillion, with bitcoin reaching an all-time high of almost $69,000 in November and Ether rising to nearly $5,000 during the same period. Hence, it is very likely that digital investors will receive a significant tax bill for their fortunes.
You must be having a lot of questions like how is the tax rate calculated? How do Crypto taxes work? What else should I be aware of? It is a lot to deal with, but you will not face any issues managing your crypto taxes if you have a clear understanding. Fret not because we have got you covered.
In this article, you will get a detailed guide about the taxes on crypto in the US and how to manage them. So, buckle down, and let’s dive deeper without further ado.
It is noteworthy that for tax purposes, the IRS or the Internal Revenue Service considers cryptocurrency holdings to be “property.” Hence, when you make a profit after the sale or disposal of cryptocurrencies, you are required to pay taxes on the amount of profit. Therefore, taxes on cryptocurrencies are no different from the taxes you pay on any other profit received from the sale or exchange of an equity asset.
In the United States, the tax on your crypto gains is dependent on two major factors, namely – your income and the holding period. Let’s look at a brief detail about both of these factors.
The income directly affects the tax. The higher your income from crypto, the higher the tax will be. However, you can make deductions if you face losses, but please note that there is a limit to how much you can deduct from capital losses if your crypto assets become worthless.
It refers to the period for which you saved your crypto. In general, the tax rates get affected by the number of months you have held the asset. For example, if you have kept the crypto for less than 12 months, you will be taxed at short-term capital gain rates. However, if you have held the crypto for more than a year, you will be taxed at a long-term capital gain rate.
Everything about Cryptocurrency Tax Rates
The tax rates for cryptocurrencies are not different from the capital gains for federal taxes. However, you must note that the tax rates do get affected by several factors, the most important one being the term.
So, if your crypto income falls under short-term capital gain, the tax rate would range between 10-37%. On the other hand, if your crypto income falls under long-term capital gains, then the tax rate will vary between 0-20%.
Taxable Events in Terms of Crypto
A taxable event is any event that triggers the profits or, in simple words, the possibility that brings you a fortune. It means that transactions in cryptocurrencies may need to be recorded as holding gains or losses, which means tracking the value of cryptocurrencies as they are bought and sold over time. And if you exchange one crypto for another, you will also need to report this.
Hence, in the case of crypto, taxes are paid when you sell, trade, or swap cryptocurrencies in any way and recognize profits.
Here is a brief description of each such event to help you understand. Have a look.
Selling a Crypto
As many believe, selling cryptocurrencies may include taxing some of your income at a higher rate, but it doesn’t push all of your income into a higher tax bracket.
For example, if you buy $1,000 worth of cryptocurrencies and then sell them for $1,500, you will have to declare and pay tax on the $500 profit. On the other hand, if you own cryptocurrencies and admit a loss, you can deduct it from taxes.
Trading a Crypto
If you exchange cryptocurrencies for goods or services, you will be taxed on the fair market value of the total number of cryptocurrencies, as if it were ordinary income.
For example – Assume that before 2015, you purchased five bitcoins for $100 each in a bitcoin transaction. And now that the value of one bitcoin has soared, you buy any new asset, say for $60,000 using one bitcoin (assuming that one bitcoin was worth $60,000 at the time of your purchase.)
In this case, you have a taxable event when you trade your bitcoin for the asset by making a bitcoin transaction. As a result, you have a $59,900 capital gain that you must disclose on your taxes.
This taxable event happens when you trade one kind of crypto for another to gain. For example – assume that you bought five coins of any new cryptocurrency for $500. You exchanged all of those coins for 1 ETH after a few months (Ethereum). So, technically those five coins were valued at $3,000 when you made the trade. Hence, you made a capital gain of $2,500, which you must report on your taxes.
Hence, if you exchange one cryptocurrency for another, you will need to report income in US dollars on your tax return. How you report cryptocurrency on your tax return depends on how you acquired it and used it.
The cost increased by4.23%Buy Ethereum
Note: Transferring crypto from one wallet to another is not taxable. Moreover, suppose your only cryptocurrency-related business this year was buying virtual currency with US dollars. In that case, you do not need to report it to the IRS as directed on your Form 1040 tax return.
How to Minimize Crypto Taxes
It is not wise to pay high taxes even when there are ways to minimize them. So, if you are a dedicated digital investor and want to reduce taxes, here are the methods for you. Have a look-
Hold Your Asset for a Long Time
In the US, if you buy cryptocurrency today and hold it for 12 months or more before selling it, you may be eligible for a long-term capital gains tax rate. That can be a daunting task, but if you have the patience and fortitude to hold your cryptocurrency for at least a year before selling, you will most likely pay a lowered tax rate on any capital gains.
As long as you are holding crypto as an investment and not earning any income, you generally don’t pay tax on crypto until you sell it. So, if you have time and can afford to wait, it is better and can save you a great deal of fortune.
Leverage the Losses
Cryptocurrency tax loss collection is similar to not having a cryptocurrency sell rule, and you can use it to offset your total tax liability.
You can take advantage of crypto gains by declaring losses on other investments the same year you realize your profit, just like any additional investment. For example, if you made $20,000 selling Dogecoin but lost $20,000 selling Ethereum, then you wouldn’t owe any tax because your profit and loss are now even.
Moreover, you should examine the rest of your portfolio to determine if you have any other losing investments that you could sell to offset your gains. If you lose much more money in a year than you make, you can deduct up to $3,000 in excess losses from your personal income taxes and carry forward any unutilized losses to offset future investment profits.
Claim Mining Expenses
Mining cryptocurrency comes with a slew of costs, including computers, servers, electricity, and internet service provider fees. So, if you’re a crypto miner, you can deduct these expenses from your earnings, albeit the amount you can deduct will depend on whether your operation is classified as a company or a hobby.
It is well known that making donations can help you save a decent amount on taxes. So, if you don’t need all of the profit from your crypto investment, donating at least some of it to charity can help you save money on taxes. You’ll get a tax break equal to the whole amount of your cryptocurrency, including any gains.
With the stunning rise in the value of some cryptocurrencies like Bitcoin and Ethereum, crypto traders and enthusiasts could face serious tax problems. Therefore, those who transact with cryptocurrencies have more reason to be aware of the law and the taxes they may incur due to their actions.
Managing your crypto gains and losses requires skills, knowledge, and patience. So, if you want to do it the right way, you must be aware and vigilant.
Now that you have ample information on the crypto taxes and how to manage them, we hope you will make smart moves!