Crypto Taxes – A Complete Guide

Cryptocurrencies are virtual or digital currencies that are mostly decentralized networks with the help of the innovative technology of blockchain. Blockchains play a vital role in cryptocurrencies to guarantee the integrity and safety of transactions and information by utilizing organizational and security systems. In fact, it’s almost impossible to produce copies of a Cryptocurrency and even spending it twice is also unfeasible due to its cryptography. Crypto taxes should not be overlooked.

Moreover, investors use their Cryptocurrency assets to purchase goods and services, and they even buy or sell other Cryptocurrencies to earn a profit. Because of that, many countries decided to require their citizens to pay appropriate taxes whenever they make cryptocurrency transactions and earn an income.

In fact, in the US, Cryptocurrency is considered a property that those who are making a profit from it should have tax obligations they need to include when filing their returns. Hence, if you want to know anything about crypto taxes in the country, read the complete details below as your complete guide to know your tax liabilities whenever you make crypto transactions in the future. 

Are Cryptocurrencies Taxable?

The Internal Revenue Service or IRS identifies crypto as property. That’s why selling and purchasing crypto is taxable in the United States. It started in 2019 when the taxpayers are required to answer whether they had made any crypto transactions in the year they processed their returns, which is answerable by yes or no. That’s why if you fail to report or declare these transactions you’ve made on your form, you’ll surely face penalties and tax consequences. Hence, it’ll be best to review the official IRS guidance, its publication 544, and the IRS Cryptocurrency FAQ page to know anything about crypto and bitcoin taxation in the country. Don’t forget about non-fungible tokens (NFTs), as trading NFTs can also have tax implications.

How is Cryptocurrency Taxed in the US?

The tax rate for your capital gains will also be the same tax rate for your Cryptocurrency. Then, the IRS will calculate your gains based on the income you’ve earned and the holding period of your Cryptocurrency. For long-term capital gains, the tax rate ranges from zero to twenty percent. On the other hand, the tax rate for short-term capital gains is from ten to thirty-seven percent. 

Moreover, the IRS will require you to include your tax return whenever your Cryptocurrency investments earn an income. Besides that, you also have to fully understand the different taxable events, such as income tax events and capital gains tax events, that can cause you to gain a profit because each one of them is taxed in different ways. You can also save money by using an LLC instead of Schedule C for crypto earned from mining.

The taxable events for long-term and short-term capital crypto gains include selling your Cryptocurrency for fiat money (such as the Euro, Pound Sterling, and the US Dollar), purchasing goods or services using your crypto coins, and trading your Cryptocurrency for another Cryptocurrency asset.

On the other hand, the income tax events include earning a profit from liquidity or staking pools, earning interest from DeFi or decentralized finance, getting crypto compensation for completing a task, earning an income when you receive block rewards and transaction fees, and acquiring Cryptocurrency through Airdrop. Cryptocurrency you receive from mining is also subject to tax.

Furthermore, these rates of crypto taxes USA are in accordance with the guidelines provided by the IRS since 2014. That’s why those individuals who sold their crypto capital assets and earned a profit should include it in their returns and pay their taxes. 

Is There a Capital Gains Tax on Cryptocurrency?

Yes, there’s a tax on crypto gain according to the IRS rules and guidelines. The amount of your capital gains tax that you owe will be based on the holding period of your crypto assets and the income tax bracket you belong to. Besides that, as previously mentioned, the tax rate for your capital gains will be the same tax rate for federal taxes of your Cryptocurrency. The calculation of your total gains that the IRS is using will depend on the profit you’ve earned and the entire duration of holding your crypto asset. 

Moreover, the long-term and short-term capital gains will be based on the time from purchasing your Cryptocurrency asset until you send, trade, or sell it. It means that if your crypto asset has a total holding period of three hundred and sixty-five days or less than that, it’ll become your ordinary income and will be eligible for taxes as your short-term capital gains. 

Besides that, you’ll have the tax rate for your long-term capital gains when there are three hundred and sixty-six days or more than that of the total holding period for your crypto coins. That’s why there are taxes on crypto gains whenever you earn a profit from your Cryptocurrency investments. 

Long-Term Capital Gains Crypto Tax

Whatever profits you’ve earned or losses you’re incurred from your Cryptocurrency assets with a holding period of more than one year will have much lower tax rates based on your income.

Source: Internal Revenue Center

Day Trading Crypto Taxes

Day trading is when you do crypto trading in a very short time. Its primary goal is for your asset to get sold before the day ends while you’re expecting to earn a little profit quickly. It means that you can hold your crypto asset for a few hours or as short as a couple of minutes until someone finally decides to buy it from you. 

Moreover, suppose you’ve earned a profit from your crypto asset held for less than one year, like day trading Cryptocurrency. In that case, the tax rate you’ll be paying is the same as your usual tax rate because it is short-term capital gains, which is from ten to thirty-seven percent. Hence, as you can see, it’s much higher than the long-term capital gains tax rate, which is from zero to twenty percent. 

Besides that, you won’t only owe taxes for these capital gains, but your AGI or adjusted gross income will also increase. Because of that, you’ll have a limitation to qualify for any tax credits and even particular itemized deductions with income limits. On top of that, it can also affect your qualification for the relief payment or stimulus check. 

What is not taxable?

Crypto can become non-taxable when you donate it to a qualified tax-exempt charity or non-profit organization. If you also buy crypto with cash and hold it, it’s not also taxable because there’s no loss or gain when you’re not just holding it. Besides that, transferring crypto between wallets and transferring crypto between Coinbase accounts or from an external wallet to another Coinbase account is also not taxable because it doesn’t cause you to have any losses or capital gains. 

Losses

If you sell your Cryptocurrency for a lower value than when you purchased it, that will be considered your loss. Taxpayers will have a capital loss deduction if they have incurred a net capital loss for a particular tax year. Hence, if you have Crypto transactions with capital losses, that will give you benefits for your tax savings, and you may be eligible for a tax refund. 

Trading Losses

When you do cryptocurrency trading, you have to choose a particular cryptocurrency and predict its movement, whether it falls or rises in value. Then, you can buy it if you think it’ll rise and sell it if you think it’ll fall. It means that if your prediction is correct, you’ll be earning a profit. However, if your speculation is wrong and the market moves against you, you can consider it your trading losses. 

Exchange Hacks

Cryptocurrencies are secure, but crypto exchanges may have various factors that make them vulnerable and become the target for online hackers. In fact, the number of incidents of crypto exchanges being hacked continues to increase every year. Hence, if you’re one of them, you can claim your losses by reporting them and filling out Form 8949. 

Ponzi Scheme Losses

If you’ve experienced losing a crypto investment from a Ponzi scam, it won’t be subject to the capital loss limitation of $3,000, but it can be an itemized deduction in your taxable income. It’s called a “Bernie Madoff deduction.” It’s named after Bernard Madoff, the Nasdaq stock market chairman before, and was convicted for running financial operations with fraudulent activities. However, for you to qualify for claiming any Ponzi deductions from your taxable income, there should be someone you have to charge with the said criminal offense formally. 

Theft

Many people have become victims of cryptocurrency theft, and it continues to happen up until today. Even though those in this industry continue to find ways to make their crypto investments safe, hackers are also looking for innovative ways to improve their skills and system faster than the quality of the existing security measures in the crypto world. 

Because of that, custodians have already asked for assistance from law enforcement to help them track and trace those hackers with their fraudulent activities in stealing virtual currency. If it happens to you in the future, it’ll be your crypto losses, and you can report and claim it by submitting Form 8949. 

How to File Crypto Tax Returns?

The first thing you need to do is evaluate your crypto transaction to see if you owe crypto taxes. The taxable crypto activities include paying for goods or services, selling crypto for cash, receiving mined crypto, purchasing particular crypto with another crypto, receiving crypto rewards, and being paid by airdrop or in crypto. After determining your taxes based on your crypto transactions, you should report all of them on your tax return. 

Then, the next thing you should do is check whether you’ve incurred losses or gains in every crypto transaction you made. After that, it’ll be best to consult your tax advisor to know the appropriate selection method that will fit your tax situation in getting a particular treatment for your crypto transactions. 

NFTs and taxes are more complicated. We’ve written a tax guide for NFT creators and investors.

Once done, you’re now ready to prepare your forms to file your US crypto tax returns. It includes Form 8949 that you need to provide all your transactions that qualify as capital gains or losses. The other one is Form 1040 that you need to fill out the summary of your capital gains and losses. Lastly, Form 1099-MISC is when you have to report fees or rewards income from staking and other programs if you’ve earned $600 or more within the tax year. Hence, after filling out the necessary forms, you can now submit and file your tax returns. Also, keep in mind that the IRS typically has three years to audit your crypto tax return (or longer in some cases).

FAQs

Do you have to pay taxes on bitcoin?

The Internal Revenue Service technically considers Cryptocurrency as property, including Bitcoin. That’s why those who make transactions in this industry should pay crypto taxes every tax year. In fact, the IRS has already included crypto on the list of questions that a taxpayer should answer, either a yes or a no on Form 1040, which they have to fill out when filing their returns. 

Do you pay taxes on bitcoin if you don’t sell?

Cryptocurrency is considered property according to the law in the United States, including Bitcoin and other cryptocurrencies available in the market today. However, those who have any crypto transactions will only be eligible for taxes when gains are realized. It means that if you sell or spend it and realize a particular profit, it’s when you earn an income as your gain in Bitcoin, and you’ll be required to pay your taxes for it. 

How do I cash out Bitcoin without paying taxes?

Today, investors from different countries pay taxes on their profits on Bitcoin and other popular digital or virtual currencies. However, some people can cash out Bitcoin without paying taxes or at least lessen the tax obligations in various ways. Hence, to know more about it, check the details below. 

• You can invest in a tax-free country. In fact, some different states and countries offer lower rates for income taxes. 
• You have to wait for your short-term gains to become long-term gains so that you can minimize your tax obligations. 
• Investing during a low-income year will help you file your returns with as little income tax as possible. 
• Sending your cryptocurrency to one of your family members will also reduce your taxes when you cash out Bitcoin. It’s because the IRS allows crypto investors to send virtual currency as a gift family members tax free at a maximum of $15,000 in a year. 
• Investing in IRA or Individual Retirement Account can also help minimize your owed taxes when you make transactions on Bitcoin. Your contributions will become deductible, and your Bitcoin earnings in your IRA will also be tax-deferred until you decide to withdraw them.  

How do I report Bitcoins on my tax return?

Whatever income you’ve earned from Bitcoin, you have to include it when you file your tax return. You should report it using the attachment of Form 1040, which is Schedule D. Keep in mind that all of the information you’ll be providing should be under the right heading and in the correct columns that you can find on the form. 

Do I have to pay tax on Cryptocurrency?

Yes, you have to pay taxes on Cryptocurrency. It’s because according to the rules and guidelines of the IRS,  Cryptocurrency is a property that requires those who earn a profit from it to deal with tax obligations. It started in 2019 when all taxpayers need to answer a particular question on the form by a yes or no to confirm whether they have Cryptocurrency assets or have any crypto transactions during the tax year. Since it’s everyone’s legal obligation to declare their Cryptocurrency asset, there will be corresponding consequences and penalties if anyone got caught without complying with the tax laws.  

How is crypto taxed in the US?

The IRS uses a particular tax rate to determine your tax obligations. The Cryptocurrency tax rate that will be used will be the same as your capital gains tax rate. Besides that, the IRS will calculate your gains based on the holding period of your crypto asset and the profit you’ve earned. For short-term capital gains tax rate is from ten to thirty-seven percent, and the long-term capital gains tax rate ranges from zero to twenty percent. 

Is Bitcoin taxed in the US?

According to the IRS, Cryptocurrencies are assets that are similar to a property that requires appropriate taxes. In fact, it started in 2019 when taxpayers need to answer yes or no to a particular question on Form 1040 to confirm if they have Cryptocurrency assets or have made crypto transactions during the current tax year. If yes, they have to report and include all of their Bitcoin transactions when filing returns. 

Does Coinbase report to the IRS?

Yes, Coinbase will report all of the transactions you’ve made during the current tax year to the IRS. In fact, Form 1099 will be sent to you if the cryptocurrency gains you’ll be submitting is more than $600, if you pay your owed taxes in the United States, and if you are a user or member of the Coinbase crypto platform. However, even though you haven’t met the requirements of this form, you still have to include and submit your crypto transactions to the IRS. 

How can I avoid paying crypto capital gains tax?

Many crypto investors across the globe can lessen or even avoid paying taxes for capital gains in various effective ways. Check some of them below.

• You can have long-term investments, and you’ll be paying capital gains tax for the lowest possible rate. 
• Investing in a tax-deferred retirement plan, like IRA, 401(k), and many others will give you an advantage of earning interests in your contributions that are deductible for a certain amount. Besides that, the retirement plan you chose will also allow you to purchase and sell crypto investments without worrying about any accumulated taxes from your capital gains. 
• You can also minimize your tax obligations on your capital gains whenever you have incurred some investment losses. 
• Waiting for your short term capital gain to become long-term capital gain will also help you decrease the taxes you owe. 

Do you pay taxes on Cryptocurrency?

The IRS considers Cryptocurrencies as an asset like the other properties you own. That’s why you need to pay the appropriate taxes in every crypto transaction you make that triggers a profit. Besides that, the IRS uses a particular tax rate to determine the tax obligations you owe based on the profit you’ve earned and the holding period of your crypto asset. 

Do I need to report Cryptocurrency on my taxes?

As a taxpayer in the country and owner of a Cryptocurrency asset, it’s your legal obligation to file your return, including all of the crypto transactions you’ve made during the tax year. You have to report it on Schedule D, which is the attachment of Form 1040. Besides that, you always have to remember to properly put all of the information you’ll provide on the form in the correct columns and headings to avoid any future unnecessary errors in your tax return. Check out our list of top crypto tax software.

Are crypto donations taxable?

According to the rules and guidelines of the IRS on crypto taxation, crypto donations to charities won’t trigger any loss or capital gain. Hence, whenever you give a crypto asset as a donation that you’ve been holding for more than a year, you’ll get a particular tax deduction of the same value of your asset in the market during the time of your donation. On the other hand, if the crypto asset you’ve donated has a holding period of less than a year, the tax deduction you’ll be receiving will be less than the fair market value of your asset during the time of your donation. 

Do I have to pay tax on crypto Airdrop?

Airdrops are free coins that you’ll receive in your wallet. The income will depend on the fair market value of these coins when you get them, and there’s also a CoinTracker you can use to check and monitor the existing coins you received. That’s why according to the IRS, you’ll be paying appropriate taxes for every coin you’ll be receiving as an ordinary income.

Is transferring Cryptocurrency between wallets taxable?

If you have two or more exchange accounts or wallets and you want to transfer crypto between any of them, that is considered a non-taxable event. If you didn’t trade your crypto for fiat currency or another crypto asset when you did the transfer, you wouldn’t be paying any taxes. 

Conclusion

Cryptocurrencies continue to gain popularity as the number of people interested in investing in these digital or virtual currencies keeps increasing worldwide. However, you might have heard some stories from other people who experienced capital losses sometimes. Still, you can’t deny the fact that there are tons of investors across the globe who are continuously enjoying their success in Cryptocurrencies. Hence, if you’re one of them, as you keep on earning profits from your crypto assets, you have to be aware of your legal tax obligations during tax season. Besides that, always remember anything discussed in this article, and it’ll serve as your complete guide whenever you make another crypto transaction again, hoping it will trigger a large amount of gains to maximize your profit tremendously.