Do you have cryptocurrency in your account? How many varieties of digital currencies do you have? It may be possible that you bought Bitcoin several years ago when its price was $ 50, and now you are thinking of taking some profit out of it.
Or, you are a new investor in this cryptocurrency club and now thinking of buying some Ethereum and other altcoins so that you can earn short-term profits on it. Whatever the case, your crypto transactions will impact your cryptocurrency taxes in 2022 either way.
“Cryptocurrency taxes” is a vast topic, and many things are considered. First, you need to know how to buy cryptocurrency to understand it fully. This article provides a detailed guide if you are a new investor in the crypto world.
What is Cryptocurrency Taxes?
Cryptocurrency is a well-known online asset all around the world. The IRS treats it like a capital asset, such as bonds and stocks. Similar to the profit you get from other capital assets that are taxed, either as income or capital gains, you also need to pay cryptocurrency taxes . It all depends on where you buy the currency and the holding period.
You need to know whether the cryptocurrency you own is taxable or not. For this, it is critical to understand taxable events and non-taxable events. Let’s understand each one by one:
When Should You Not Pay Cryptocurrency Taxes?
Here are some conditions when you do not have to pay cryptocurrency taxes. You can keep this digital asset in the same category without paying taxes if you are also in the same category.
- Crypto is not taxable when you buy crypto with cash and hold it. Usually, tax is incurred afterwards as you sell it, and its gains are “realized.”
- You do not have to pay crypto taxes if you donate crypto to a qualified non-profit or tax-exempt charity.
- Suppose you are fortunate to receive cryptocurrency as a gift from someone. There is no condition to pay taxes on this unless you sell it or participate in staking (a taxable activity).
- Do you know you can gift up to $ 15,000 annually to a recipient and do not have to pay tax? All you have to do is file a gift tax return. All the transactions made outside of purchasing any item or services to someone’s wallet come under the category of gifts.
- It is not taxable if you transfer crypto between your accounts and wallets.
When Should You Pay Cryptocurrency Taxes?
You have to pay cryptocurrency taxes if you come under any following categories. Carefully, analyze each point to look into which category you fall. This is because it is a must to pay taxes for investors in these categories.
- You own taxes if you sell your crypto for US dollars. Similarly, you have to pay tax if you owe assets for more than you paid for them. If your currency is sold in loss, you can minus that loss amount on your taxes.
- Another condition is that you spend cryptocurrency to purchase goods and services . For example, using bitcoin to buy a burger, you must pay taxes on the transaction.
- The conversion of one cryptocurrency to another is also a situation that makes it a taxable event. For instance, if you use ether to buy bitcoin, you have to sell ether before you purchase a new currency (bitcoin). The IRS considers it taxable as this is a sale. Therefore, you are required to pay cryptocurrency taxes if you sell your bitcoin for more than you paid for it.
Guide to File Your Cryptocurrency Taxes
The tax return standard form 1040 inquires if you were engaged in any online currency transactions within the 12 months. If your answer is positive, then you need to take care of the following things:
Keep Track of All Transactions
Keep recording your transactions of crypto. This may include the amount you paid for crypto, the amount you sold, the period of holding it and receipts for every transaction.
It may be possible that you receive a 1099-B from the crypto exchange that reports your crypto transactions to you and the IRS. However, it will not record the original amount you paid for your crypto and the cost basis if you move coins between your account and offline cold wallets.
According to Baker Bott’s tax partner, Mr Jon Feldhammer, this is an important issue that needs urgent attention. For this purpose, many software companies are emerging that use blockchain to find transactions between your wallets.
They provide detailed reports of transfers related to the wallets within a tax year. Several popular tools like Cointracker and Koinly connect to crypto wallets and exchanges. They complete the forms you require to file your cryptocurrency taxes and track your crypto transactions.
Complete the Tax Forms Properly
As soon as you have a crypto transactions record, the next step is to fill out specific tax forms, which depend on your crypto usage. Here is a list of these forms. Let’s check them one by one.
- Form 8949: This form aims to log every sale or purchase of crypto as an investment. This comprises loss or gain for every transaction, the price at which you sell, the date of selling, the cost and date of buying and the total number of currencies.
- Schedule D: The Schedule D form summarizes your total capital losses and gains from your overall investments, including crypto.
- Schedule C: If you receive crypto coins from mining, it is essential to reveal whether you have them as a hobby or business. If you are in charge of the crypto mining business, you can pay self-employment taxes if your income is more than your yearly expenditures.
- Schedule 1: If you report mining crypto as a hobby, this income will be noted on Line 8 of Schedule 1. For this particular case, you do not have to pay self-employment tax.
Filing Your Cryptocurrency Taxes
If you use software like CoinTracker and Koinly, you can link this software with any tax software. After that, use that tax software for filing your overall federal and state tax returns. One example of such software is Token Tax. It is a one-stop for all services related to tax. It offers all accounting services to prepare and track your regular and cryptocurrency taxes.
Get in touch with a Professional
It is not easy to prepare for cryptocurrency taxes; the laws are constantly changing. So, if you have gained a significant amount from crypto, hiring an expert CPA (certified public accountant) is recommended. This person specializes in all the work related to tax, so you don’t have to worry about IRS asking you to pay taxes.
Tips to Minimize Cryptocurrency Taxes
Here are some easy strategies to follow if you want to minimize your crypto taxes.
Offset Profits with Losses
You can benefit from crypto profits by collecting losses on other investments. For example, if you spend money buying Ethereum and gain $ 5000 when you sell it, but at the same time, you face a loss of $ 5000 for trading Bitcoin, then you do not have to pay cryptocurrency taxes because you will be on a breakeven mode. You will have no losses or gains.
Though, these losses aren’t restricted to other types of cryptocurrencies. Analyze your portfolio carefully to find if you have any losing investments that you can sell to break even when you are about to redeem a significant crypto investment.
I f you had a significant loss that is more than your profit in a year, you can subtract the excess losses from your income taxes. You can use unused losses to offset investment gains in future.
Long-term holding of cryptocurrency
Do you know if you hold your investments in crypto for at least 12 months before your sale, your profits qualify for the special capital long-term gains rate?
This will discount your taxes up to 50%. The rates may range from a maximum rate of 20% for long-term profits and 37% for short-term gains.
Wait for Lower Tax Rates
According to the UNC Tax center’s research director and University of North Carolina’s associate professor Jeff Hoopes, always wait for a lower tax rate if you have time. Do not rush to sell or buy crypto.
You might come under a lower tax bracket with any possible condition, like moving to a state with lower tax rates or being laid off. This will allow you to sell your crypto while paying low taxes.
Claim Mining Expenses
In theory, it might seem like a low-price activity, but in practical, crypto mining involves substantial expenses. This includes charges for internet service, servers and computers. You can estimate these expenses if you are a crypto miner and then minus all these expenses from your mining profit. However, categorize whether you are doing crypto mining as a hobby or business. This is because the deduction of the amount depends on this factor.
Make Investments via a Retirement Plan
There are several retirement plans available. You can make use of any such retirement plan to invest in crypto. This will allow you to avoid or defer investment gains completely. However, it is not easy to invest via a regular brokerage account.
Donate to Charity
Another way to decrease your cryptocurrency taxes is to donate some amount of crypto to charity. In this way, you will not be able to earn all of the profits from the crypto investments, but you will get a subtraction worth the actual value of your crypto, including any profits. Generally, it makes sense only if you have decided to donate to charity.
Final Words: Cryptocurrency Taxes
The term “taxes” never excites anyone. Most people are not aware of how much tax they need to pay if they invest in cryptocurrency. If you want to become a crypto investor, it is a must for you to learn how cryptocurrency taxes work. Even though cryptocurrency investments have emerged recently, the IRS is working in full swing to apply crypto tax compliance.
This crypto tax guide explains everything you need to know about taxes on crypto income and trading. You’ll learn how to minimize crypto taxes, file them, and when you need to pay and not pay these taxes. There are some easy tips through which you can easily reduce your tax to almost negligible. There is also information available about taxable and non-taxable events.
Just know in which category your investment comes in. Then, you can quickly pay all taxes accordingly without any hassle.