The topic of taxes and cryptocurrency can seem intimidating at first but, after you have a substantial understanding of the tax implications you may have around your bitcoin, you can make better decisions to lessen the burden of the taxes. The following article will help provide some insight into how to do your taxes with Bitcoin.
The Basics of Bitcoin Taxes
Cryptocurrency may not have many laws yet, but the one clear thing is that it's up to the person who uses cryptocurrency to calculate and pay all taxes owed.
The IRS says that any cryptocurrency you buy, sell, or mine is considered a property. You should also be aware of capital gains and losses when you trade in cryptocurrency. The IRS does not consider cryptocurrency to be money. But if you are paid in cryptocurrency by your employer, the IRS will count this as income.
Here is a basic tax guide on cryptocurrency:
- When you trade cryptocurrency to the dollar, it is a taxable event.
- Making use of cryptocurrency to buy goods and services is a taxable event.
- Exchanging cryptocurrency to another cryptocurrency is a taxable event.
- Gaining a fork or airdrop counts as gross income
- Transferring cryptocurrency as a gift is not a taxable event.
- A wallet-to-wallet exchange is not a taxable event.
- Purchasing cryptocurrency with USD is not a taxable event. You don't get any gains or losses until you trade or use your crypto.
Basically, anything other than purchasing and holding a cryptocurrency is an event of taxation (meaning you earn capital gains or losses at the time when you are trading).
How Much Do You Pay On Your Crypto
How much you incur in capital gains tax is different in the United States depending on how long you hold your assets and where you are in an income bracket.
Short Term Capital Gains
When you sell a cryptocurrency that you've held for less than a year, the income is considered short-term capital gains. These capital gain taxes are included to where your income places you in federal tax brackets so that they will be paid at the same rate as ordinary taxes on it.
You can use losses to help pay for your tax. The most you can deduct is $3,000 from your taxes. Any other losses will be carried forward to next year.
Long Term Capital Gains
A long-term capital gains tax is applied to cryptocurrencies held for more than 12 months. The rates are 0%, 15% and 20%. This rate is typically much lower, so HODLing will always be the most efficient way of paying taxes because they have extremely low-income brackets compared to the ordinary bracket who has an enormous range from 10-38.6%.
Crypto transactions that are classified as income can be taxed at your personal tax bracket.
- Short-term capital gains
- Staking rewards earned from holding certain cryptocurrencies in wallets or exchanges
- Airdrop coins generated by the blockchain projects you use on an ongoing basis
- Interest earnings made through cryptocurrency lending services
What Types of Bitcoin Transactions are Taxed?
Understanding Bitcoin transactions is very important for planning ahead and making smart decisions on how to utilize your coins best. It's good to know about what a taxable event is. This will assist you in the future to know when money might come and go. It can also help you to know if you made any money during that time period.
- Taxable: If you sell, trade, or spend your bitcoin, there will be a taxable event. You need to report this to the IRS. Also, if you mine bitcoin, it is also considered income and will be taxed.
- Non-Taxable: HODLing, buying bitcoins with a dollar, sending bitcoins from one wallet or exchange to another, and using bitcoin as collateral are all non-taxable events, and you do not need to report this to the IRS.
How Do You Calculate Your Bitcoin Taxes?
First, you calculate the capital gains and losses for each of your crypto trades. You do this by using a formula that is like this: Fair Market Value - Market Price = Capital Gain/Loss.
- Fair Market Value
A fair value of an asset is how much it would sell for on the open market. In the case of cryptocurrency, this is usually the sale price in US dollars.
- Market Price
The Market Price for your cryptocurrency is how much money you spent on buying it. This includes fees and any other costs associated with buying that cryptocurrency.
A great way to stay track of your trading activity is by having records that document all the pertinent information. Without these, you won't be able to calculate realized income from crypto trade or report it on taxes- so make sure you have a system in place.
Having good documentation can help traders stay accountable for their trades and avoid getting audited when they file this year's tax return.
Report Gains and Losses on Bitcoin
If you're like most other crypto investors, you likely only have bought or sold your crypto through a cryptocurrency platform. If this is the case, all your income will be reported as capital gains income.
However, if you earned cryptocurrency from a job, staking, mining, or earning interest rewards—your earned income is generally treated as ordinary income.
Capital Gains and Losses for Crypto
Form 8949 is the tax form you use to report your crypto trades and generate capital gains or losses. It's one of many IRS forms used for reporting stocks, bonds, mutual funds, real estate transactions, etc.
To fill out Form 8949, enumerate all of your crypto trades, sales, and disposals. The date you acquired the crypto and the date you sold or traded it. The amount of money that you made (or lost) on each trade and the market price for the crypto is a dollar amount.
Once you have all of your trades written down, find out what the net capital gain or loss for the year is.
How to Do Your Taxes with Bitcoin Using CryptoTrader.Tax
A common solution to the cryptocurrency tax problem is integrating all of your transactions, trades, and forks into a single platform so that you can create a comprehensive tax profile.
Once you have your bitcoin investment activity synced between all of the separate bitcoin exchanges, brokers, and wallets that house them across different accounts or currencies, it is easier to calculate your taxes.
You can put your transaction history together by hand. This means that you will need to find all of the transactions from each of your exchanges and wallets. But it can be a lot of work, so some people choose to use crypto tax software instead.
New interactive cryptocurrency tax software like CryptoTrader.Tax was created to automate the whole cryptocurrency tax reporting process.
The CryptoTrader.Tax engine offers fast and accurate calculations through a convenient interface that is possible with direct integration to leading exchanges, wallets, blockchains, and DeFi protocols.
How It Works:
- Choose all of the cryptocurrency exchanges, wallets, or platforms you've used all through the years.
- Historical transactions can be imported by connecting your accounts via API or uploading a CSV transaction history report exported by your exchanges.
- Finally, create your tax reports based on this imported information with a simple click of the button.
Once you've created your tax reports, you need to submit them to a qualified expert or transfer them directly into your preferred tax filing software like TurboTax or TaxAct.
TurboTax has partnered with CryptoTrader.Tax to make crypto tax reporting easy. This means your reports are automatically imported into TurboTax, and a lot of the work is done for you.
The whole crypto market is still in its early years. As the industry evolves, further rules and regulations will inevitably come forward. With the continued growth of blockchain technology, it is undoubtedly a matter of time before cryptocurrency becomes more prevalent.
Regardless if Bitcoin will become an accepted form of currency in the future or not, there are still potential tax issues that need to be addressed.
Bitcoin and taxes can seem confusing at first but understanding your needs for reporting can make filing much easier.