If you’re an investor in cryptocurrencies and other assets on the blockchain, you’re probably looking forward to big juicy gains - like investors in every other sector. However, unlike in Bitcoin's earliest days, you now have to share some of these profits with the taxman.
However, taxes are pretty fundamental to most advanced economies everywhere. Plus, it’s essential that the blockchain shakes off the impression of being a haven for tax evaders. Speaking of tax evasion, there’s an important question we need to address first.
Do I need to pay taxes on crypto in every country?
Well, sort of…
The fast pace and early nature of blockchain technology have meant that many governments worldwide have been slow to catch up with developments in space. In most countries, regulation has simply not kept up with the speed of innovation in crypto. As a result, there aren’t neatly outlined ways for crypto holders to be tax compliant.
Thankfully this is starting to change - especially in developed countries. This article will focus on the current stipulations in the United States and its world-famous tax watchdog - The IRS.
What taxes on crypto do I need to pay?
For starters, the US considers crypto a digital asset and treats it the same way as stocks, bonds, and others. Just like these assets, how you use your crypto determines if you owe taxes or not.
You can be taxed when taxable events are performed and exempt when non-taxable events occur. Let’s look at what such events are:
The IRS taxes crypto in two ways - either as capital gains or as income. This usually depends on how the crypto was gotten and used. The following scenarios are taxable in both ways:
Events that trigger Capital Gains Taxes
- Selling crypto: If you make a profit while selling your crypto for cash, you owe taxes. However, if you make a loss on the sale, that sale is deductible from your tax bill.
- Trading crypto: If you exchange BTC for LOCG, the IRS sees this as a sale - and it's taxable the same as above.
- Spending crypto: If you buy a t-shirt using bitcoin, that transaction is taxable. The IRS doesn't see spending crypto as too different from selling it.
Events that trigger Income Taxes
- Wages/Salaries paid in crypto: For instance, an engineer who works for Binance and receives a salary in crypto has to pay income tax.
- Accepting crypto as a payment method: Getting crypto in exchange for goods or services will incur income taxes.
- Mining crypto: Mining crypto will attract taxes based on the market value of the coins at the time they are mined. If the crypto is by a business, it's taxed as self-employment income.
- Staking rewards: Staking rewards are taxed like mining proceeds. You pay taxes according to the value of your rewards at the time they're received.
- Hard forks: These are taxed depending on how the crypto is used when it’s available for withdrawal and other factors. Learn more.
- Airdrops, giveaways, & other incentives: Crypto from airdrops, referral programs, giveaways, and similar rewards are taxable as income. Learn more
- Buying crypto: When you buy crypto with tax, it isn’t taxable until you sell or exchange it for something or another crypto.
- Holding Crypto: Being a HODLer means zero taxes! 😎
- Donating crypto: When you donate your crypto to a qualified tax-exempt charity or non-profit, you can claim tax deductions.
- Accepting gifts: Gifts in the form of crypto aren’t taxable unless you participate in another taxable activity such as selling or staking.
- Giving gifts: Giving crypto worth up to $15,000 annually as a gift isn’t taxable. If such a “gift” was worth more than 15k, you’d have to file tax returns, which doesn’t necessarily mean you get to pay any taxes.
- Transferring crypto to oneself: Regular crypto transfers between wallets you own aren’t taxable.
How do I calculate my crypto taxes?
To know how much you owe in crypto taxes, you need to track your buying, selling, or trading activity. If you use just one crypto wallet or exchange, tracking this might be as simple as checking your transaction history. However, suppose your crypto transactions happen across several wallets, credit cards, or exchanges. In that case, you might need help to accurately track, organize and process your activity in neat reports ready for easy submission. This is where some handy software comes into play.
The following crypto-focused tax software make this easy:
These crypto tax calculators help compile professional tax reports with minimal effort and even help with reporting.
How do I report crypto on my taxes?
In short, all gains and losses on your crypto are to be reported on Form 8949 - which is typically used to report capital gains and losses from investments to the IRS. In this form, you’re to fill out your:
- Name of the cryptocurrency.
- The date it was acquired.
- The date it was sold, exchanged, or disposed of
- The funds or value of assets realized from such a sale/trade.
- Cost basis. Learn more here
- Total gain or loss
This process is to be repeated for every single taxable event that occurs in a year.
It’s also worth noting what tax bracket you fall into. Here are the current cryptocurrency tax rates stipulated by the IRS in 2022:
With all this info now at your disposal, we certainly hope this helps you be more tax compliant, as the law-abiding citizen we know you are! 😉
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Disclaimer time! ⚠️
Crypto Rebel is not a tax advisor. This article is our interpretation of IRS guidelines which are constantly evolving. This is not intended as professional advice or recommendation. Be sure to do your own research, and consult a tax professional for relevant advice.