Legal Guide

How to Pay Crypto Tax

As cryptocurrencies are becoming increasingly widespread in the U.S. (and worldwide), the IRS is beginning to take the matter of crypto tax very seriously. In the previous years, crypto investors might have been able to get away with failing to report their crypto-related taxes. From now on, however, all investors will need to approach their taxpaying duties diligently, or else risk invoking the ire of the Internal Revenue Service.

Moreover, the crypto tax law can be complicated, especially if you’re a highly active crypto investor. In such cases, figuring out the amount you’ll need to pay in taxes can be tricky. 

But, don’t despair, as the following guide will provide you with all the info you’ll need in order to avoid crypto tax-related trouble. Here’s what you should know.

When is cryptocurrency taxable?

The good news is that not all crypto-related transactions are taxable. Simply buying crypto or an NFT for fiat currency, and then storing it on the exchange or in your wallet, is a non-taxable event. The same goes for transferring crypto between individual wallets. 

Moreover, you can safely gift crypto worth up to $15,000, or donate as much crypto as you like to any tax-exempt organization.

In all other instances, however, there will be taxes involved. This includes selling the crypto for fiat currency, trading it for other crypto, or using it to buy goods or pay for services. Also, you will be taxed if you buy NFTs with cryptocurrency, and if you sell or trade NFTs.

Additionally, if you’re getting paid for your services with crypto, you’ll need to report this income source's value on your tax return. The situations when this applies include: receiving crypto as payment instead of a fiat currency; earning coins or tokens as a reward for certain activities (Coinbase’s Earn program comes to mind); or making crypto through network mining. Earning interest through a crypto savings account is also taxable income.

How cryptocurrency is taxed

In the eyes of the IRS, cryptocurrency and NFTs are considered to be property. Therefore, they’re subject to capital gains tax. 

You can find out what your capital gain (or loss) is by calculating the difference between the value of a crypto when you’ve bought it and the amount you’ve made by selling it. In the case of your losses exceeding the gains, you’ll be able to deduct up to $3,000 from the taxable amount.

Have in mind, though, that the tax rates will be different based on your overall taxable income, as well as the amount of time you’ve owned a crypto. Namely, if a crypto was in your possession for less than a year before you sold it, then that’s considered to be a short-term gain. Such gains are taxed as ordinary income.

As for the long-term gains (i.e. gains made on crypto you’ve owned for more than one year), there are two factors that will determine the tax rate, which can be 0%, 15%, or 20%. The factors are your overall taxable income, and whether you’re single, head of household, married filing jointly, or married filing separately. For the exact numbers, we’ll refer you to the relevant page on the IRS website.

Necessary and useful forms

Form 8949 will help you to reconcile your overall gains and losses. Then you’ll need to report the gains and losses on the tax return Form 1040, by using Schedule D. The same goes for NFT investors, with the only difference being that NFT traders will need to enter code ‘C’ in column (f), because NFTs are treated as collectibles.

Additionally, some crypto exchanges may give out a Form 1099-B, which helps the investors to calculate gains and losses. Issuing this form is still uncommon. However, starting with the next tax year, exchanges will be required by law to issue this form and, thus, to directly notify the IRS of crypto transactions.  

Be prepared 

Governmental crypto regulations vary from country to country. To name an example, even though the laws are similar, not all details we’ve mentioned in this article will also apply to crypto tax in Canada. Therefore, users should investigate the laws corresponding to their country. However, there’s one thing that citizens of all nations have in common. 

Namely, paying crypto tax means being disciplined enough to keep track of all crypto-related taxable activities. It’s highly advisable to note down the value of crypto, both at the moment when you’re buying it and the moment when you’re selling it.

Many people have gotten used to preparing their returns at the end of the tax year. Unless you’re only casually buying crypto and then holding onto it, you’ll find that it’s much better to be more proactive about tax returns. Trying to catch up with a year’s worth of crypto activity is a nightmare that you can avoid with some diligence.

If that sounds like a serious drag, you’ll be pleased to learn that there are computer programs, such as, for example, TokenTax and CoinTracker, that can help you regularly keep track of crypto tax. These two programs are compatible with regular tax software like TaxAct and TurboTax, meaning you’ll be able to import the calculated gains and losses from one program into another.

With such software at your disposal and the info we’ve provided, you shouldn’t encounter issues. But if you do, we’ll point you in the direction of the IRS’ own FAQ on crypto transactions, which should be of additional assistance.

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