How to Handle Taxes and Cryptocurrency

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As cryptocurrency gains fame and attracts nan attraction of taxation authorities, knowing nan taxation implications of your crypto transactions is much important than ever. Delve into this insightful guideline to unravel nan complexities of cryptocurrency taxation, from reporting requirements to tax-saving strategies, and guarantee you're prepared to navigate this evolving financial landscape.

When cryptocurrency first deed nan segment astir a twelve years ago, it came pinch a fewer compelling qualities that made it charismatic to astatine slightest a mini number of people.

First and foremost, it’s decentralized. It’s not issued by a slope aliases taxable to nan power of nan cardinal bank, nan measurement fiat currencies for illustration nan U.S. dollar aliases nan euro are.

Second, transactions are accelerated and simple. That’s because they move betwixt individuals, not institutions.

And third, crypto transactions are cheaper because location is nary middleman collecting a fee.

Cryptocurrency and Taxes

But location was different value to cryptocurrencies that seemed particularly…intriguing. Since cryptocurrency isn’t regulated and doesn’t walk done nan accustomed bureaucratic chain, it conscionable mightiness beryllium nan cleanable costs strategy to debar income taxes.

At least, that was nan reasoning astatine nan time, and location was immoderate merit to it. After all, cryptos were a specified bug connected nan wall of nan financial universe. They were hardly drafting immoderate attraction from nan taxation authorities, particularly nan IRS.

But that was a agelong clip ago, astatine slightest successful position of modern investing, and overmuch has changed. Cryptos person grown successful fame and value, and they’ve gone mainstream. Prices for Bitcoin are now tracked and reported regularly by nan awesome financial media.

More important, cryptocurrency is nary longer being ignored by nan IRS. That being nan case, you’ll request to beryllium alert of nan effect of taxes connected your cryptocurrency transactions.

Even though nan IRS curen of cryptos is still evolving, it should now beryllium evident that nan Tax Man is actively search crypto activity. The champion strategy for crypto investors is to go knowledgeable and beryllium fresh to play by nan rules.

But what are those rules?

As I said, nan IRS is still processing strategies for handling crypto transactions. But earlier we get into nan questions, I request to counsel you that I’m a certified financial planner, not a CPA aliases taxation attorney.

That intends I’m not an master connected taxes, truthful you’ll want to consult a taxation master pinch immoderate questions circumstantial to your individual circumstances.

With that said, I’m going to do my champion to spell retired what we do cognize astir nan IRS curen of crypto transactions, astatine slightest up to this point.

Let’s screen 7 communal cryptocurrency questions.

7 Common Cryptocurrency Tax Questions

1. Are My Cryptocurrency Transactions Taxable, and Do I Need to Report Them to nan IRS?

I’ll get correct to nan point—absolutely! The IRS has moreover gotten superior astir targeting undeclared crypto earnings. They initiated a program—Operation Hidden Treasure—to way down crypto activity. And they are informing taxpayers that crypto transactions are not anonymous.

If your crypto trading is taking spot connected an IRS-compliant broker, for illustration Robinhood, you’ll person a 1099-B from nan agent reporting your crypto activities.

But let’s opportunity you’re utilizing an exchange, 1 that is not IRS compliant and doesn’t supply a 1099-B. You should cognize that you are not relieved of nan taxation liability. You’ll request to support your ain records of crypto transactions and study them to nan IRS.

Just arsenic you would pinch nan profits connected nan waste of securities, for illustration stocks and bonds, you’ll request to study and salary taxation connected immoderate gains connected nan waste of cryptocurrency. They’ll request to beryllium reported connected your taxation return.

You tin study them connected Schedule D, Capital Gains and Losses erstwhile you record your individual income taxation return.

I’ll get into really overmuch you’ll beryllium connected your crypto superior gains successful Question #3 below.

2. Do I Have to Pay Tax connected Increases successful nan Value of My Cryptocurrency if I Don’t Sell It?

Nope, nary taxes are owed because nary gains are realized aliases recognized—for taxation purposes, astatine least—until nan plus has been sold. All that has happened is an summation successful nan marketplace worth of your crypto, which is not taxable.

3. How Much Tax Will I Owe connected a Gain?

The reply to this mobility will dangle connected whether nan summation is nan consequence of a short-term superior summation aliases a semipermanent superior gain.

Short-term superior gains are gains connected nan waste of securities aliases different assets that hap successful 1 twelvemonth aliases less. Long-term superior gains are those that hap successful much than 1 year.

That’s an important truth to beryllium alert of because nan taxation rates for short-term gains are overmuch higher than they are for semipermanent gains.

Long-term superior gains person a maximum complaint of 20%, and that’s only if your income is greater than $441,450 if you’re azygous aliases $496,600 if you’re married, filing jointly.

But if your income is little than $80,000 per year, you whitethorn beryllium zero superior gains taxation (amounts complete $80,000, but little than nan period above, are mostly taxed astatine 15%).

Short-term superior gains are taxable to your mean income taxation rate. Depending connected your income, that tin beryllium anyplace from 10% to arsenic overmuch arsenic 37%.

That doesn’t needfully mean short-term superior gains are a bad situation. You’re paying taxation connected a profit. You’ll salary taxation based connected your highest marginal taxation rate. I would person to salary 37% based connected my taxation bracket. But I’d alternatively return nan profit and salary nan taxation than return a loss.

4. What Is nan Tax Treatment if I Am Lending Online Cryptocurrency?

The income you gain from lending cryptocurrency is treated for illustration liking for taxation purposes. This is akin to nan liking you tin gain connected high-yield savings accounts. It will beryllium entered connected your income taxation return and taxable astatine mean income taxation rates.

5. Can I Reinvest My Cryptocurrency Gains to Defer Capital Gains Taxes?

The IRS does person provisions for like-kind exchanges that alteration you to defer superior gains. A 1035 exchange applies to life security policies and annuities, while a 1031 exchange tin beryllium utilized for existent estate.

Basically, either speech enables you to switch 1 plus pinch a comparable plus and defer taxes until nan 2nd plus has been sold.

But this is not nan lawsuit pinch cryptos. You’ll request to salary taxation connected immoderate gains you earn, sloppy of what you do pinch nan proceeds.

6. Will nan IRS Know About My Cryptocurrency Activities?

Big Brother is ever watching! Even if you’re trading crypto connected a non-IRS-compliant exchange, nan IRS will still cognize you’ve invested money successful that speech erstwhile you transportation money from your U.S. slope relationship to nan exchange.

Large aliases predominant transfers tin extremity them disconnected that you’ve been very progressive pinch crypto investing. Cryptocurrency isn’t astir arsenic anonymous arsenic it was erstwhile it first came out. As it’s grown successful popularity, nan IRS and different authorities agencies are progressively search nan activity.

7. What if I Exchange My Cryptocurrency for Another One – Do I Still Owe Tax?

This tin hap if you exchange, say, Bitcoin for Dogecoin aliases Ethereum aliases for 1 of respective different stablecoins.

Let’s opportunity you bargain Bitcoin for $10,000, and it rises to $50,000. You past speech your Bitcoin for an balanced magnitude of Ethereum. Unfortunately, that is simply a taxable event.

Even though nan crypto beingness views it arsenic an speech betwixt 2 cryptos, nan IRS will spot it arsenic trading 1 crypto for another.

You’ll request to admit a taxable summation successful your Bitcoin of $40,000, which is nan $50,000 waste price, little your $10,000 first investment. Whether you waste nan Bitcoin for U.S. dollars aliases for different crypto, you’ll request to state nan summation connected nan Bitcoin sale.

Miscellaneous Crypto Tax Questions

While I was addressing nan questions above, I thought of a fewer much that mightiness beryllium adjuvant successful handling your crypto trades for taxation purposes.

What Is nan Order of Cryptocurrency Sales of Multiple Crypto Purchases?

For example, let’s opportunity you bought Bitcoin erstwhile was $3,000, past again erstwhile it was $50,000. The value goes to $60,000, and you determine to sell. Is nan summation based connected nan $3,000 acquisition aliases nan $50,000 purchase?

For taxation purposes, gains are recognized connected a first-in, first-out (FIFO) basis. That intends nan summation would first request to beryllium recognized connected nan $3,000 purchase, which would, of course, consequence successful a overmuch larger superior summation astatine $57,000 ($60,000 − $3,000).

The waste of nan $50,000 acquisition astatine $60,000 would consequence successful a $10,000 superior gain. But nan summation connected nan $3,000 acquisition would request to beryllium recognized first.

Do nan Tax Rules for Crypto Exchanges Change if nan Exchange Is for a Stablecoin?

Stablecoin is simply a type of crypto wherever nan worth is tied to nan dollar aliases immoderate different recognized world currency. That’s why these coins are referred to arsenic stable.

The aforesaid rules use to nan speech of immoderate crypto for stablecoin arsenic they do for exchanging for different crypto. You’ll request to admit nan summation connected nan waste of nan crypto astatine nan clip of nan speech for nan stablecoin.

Once again, it doesn’t matter if your crypto is sold for rate aliases exchanged for different crypto. The summation connected nan crypto you’ve disposed of will beryllium taxable.

Is There Any Difference Between Buying and Selling Crypto With a Broker Like Robinhood, Which Doesn’t Have Its Own Digital Wallet, and Through a Crypto Exchange That Does?

Whether you waste crypto done a agent aliases an exchange—even 1 based extracurricular nan U.S.—doesn’t alteration nan taxation consequences of nan transaction. All nan rules stated supra will apply.

The main quality is that a agent for illustration Robinhood, which is US-based and truthful US taxation compliant, will rumor a 1099-B, while nan noncompliant crypto speech will require that you support records and study your transactions from those records.

If you bargain Bitcoin connected 1 exchange, past bargain it again connected different exchange, does nan wash-sale norm travel into effect if you’re trying to waste 1 astatine a nonaccomplishment to fastener successful a short-term superior loss, past bargain it again connected different speech earlier nan 30-day model has passed?

It won’t matter because wash-sale rules don’t use to cryptocurrency since it’s considered spot and not financial security.

Speaking of nan wash-sale rule…

The Wash-Sale Rule: The Crypto Trader’s Best Friend

Up to this point, I’ve been covering nan taxation consequences of cryptocurrency transactions. But location is simply a immense taxation savings disposable pinch cryptocurrency that you can’t get anyplace else. And nan use is incredible. I had to do deeper investigation to make judge it was true.

The taxation savings are called nan wash-sale rule. Basically, if you bargain a information and it drops successful value, you tin waste it astatine a loss. But you can’t bargain nan aforesaid aliases balanced information wrong 30 days of nan waste of nan original information (or wrong 30 days earlier nan sale). If you do, nan superior nonaccomplishment will beryllium disallowed.

But arsenic it turns out, wash-sale rules don’t use to cryptocurrency. Because nan IRS classifies cryptocurrency arsenic property alternatively than arsenic a financial security, wash-sale rules don’t apply, aliases astatine slightest this is nan existent interpretation.

NOTE:

IRS announcement 2014-21 doesn’t specifically exempt crypto from wash-sale rules. Instead, it defines crypto arsenic property, which is wide interpreted to beryllium excluded from wash-sale rules.

How Does That Benefit Cryptocurrency Investing?

Bitcoin has taken a dive successful caller months. Let’s opportunity you bought $50,000 worthy of Bitcoin backmost successful March, which is now worthy $30,000. You tin waste it coming and fastener successful a $20,000 superior loss.

That superior nonaccomplishment tin beryllium utilized to trim early superior gains. Under IRS regulations, you tin deduct superior losses against superior gains.

If you usage nan $30,000 proceeds from nan waste of Bitcoin to acquisition different cryptocurrency, up to $20,000 successful gains connected those investments will beryllium shielded from taxes.

The volatility of cryptocurrency creates opportunities. At immoderate point, 1 crypto is going down while different is going up. If you consciousness it’s clip to get retired of 1 and into another, this wash-sale loophole is simply a large deal. It’s a measurement of creating tax-free gains from your losses.

Capital Loss Carryforward

Even if location are nary crypto superior gains to use nan superior losses to, you tin still get a use from those losses.

If losses for nan twelvemonth transcend gains, you tin still deduct up to $3,000 successful superior losses for that year. When nan losses transcend $3,000, you tin transportation them guardant into consequent taxation years and deduct them against income earned successful those years.

If location are nary superior gains successful early years, you tin proceed to deduct $3,000 successful superior losses each twelvemonth until your superior losses person been afloat written disconnected connected aggregate taxation returns.

Tracking Your Cryptocurrency Trades

You request to travel up pinch a strategy to way your trading activity, particularly if you’re a predominant trader. Personally, I haven’t received a 1099 from immoderate spot wherever I’ve traded cryptos, truthful search and reporting still look to beryllium thing of a grey zone.

cryptos, truthful search and reporting still look to beryllium thing of a grey zone.

You’ll request to usage specialized package to thief you way your transactions, particularly if you’re trading connected a non-compliant speech that doesn’t rumor Form 1099-B.

A Final Word of Advice connected Cryptos and Taxes

The past portion of proposal I want to springiness is that you should consult a master taxation advisor if you person immoderate questions, particularly if you’re an progressive trader.

I’m trying to make nan chat of cryptos and taxes simple, but it is perchance complicated. The IRS is still moving retired precisely really to dainty crypto transactions, and caller rulings are coming retired each nan time.

Tax professionals are nan champion group to consult astir nan latest rules. Yes, it will costs you immoderate money to consult a taxation professional. But that’s only a mini fraction of nan thousands of dollars successful taxes and penalties nan IRS whitethorn enforce connected you if you make a mistake.