Last Updated on November 14, 2023 by Ben
Many people are wondering if they have to pay taxes when selling their cryptocurrency. The answer is yes, but don’t worry! In the US, you report crypto taxes just like how you report other capital assets like stocks and real estate. Remember that for tax purposes, crypto is treated as property. But How Do Cryptocurrency Taxes Work? And Do you have to pay taxes when Selling mined Cryptocurrency?
How Do Cryptocurrency Taxes Work?
Having crypto is a big decision, and you need to know what the taxes are. The IRS has said that it should be treated as a capital asset rather than just like money. This means that people who own it have more complicated tax rules than before.
For better or worse, the IRS treats all cryptocurrencies like capital assets. If you trade your crypto for a profit, the IRS will charge tax on it.
This means that when you purchase goods or services with cryptocurrency, you owe capital gains taxes if the crypto you spend has gained in value over what you originally paid for it.
Let’s say you bought $10,000 worth of Bitcoin in early 2019 and held on to it until 2020, when it went up in total value around $40,000. If you trade your Bitcoin for a Tesla Model 3, then you would owe tax on the $30,000 profit or capital gains. You may think that you just spent your Bitcoin, but according to the IRS, this was a sale of Bitcoin (in exchange for a Tesla).
If you invest in cryptocurrency, and the value of that decreases, you sell it for dollars, or if you exchange it for another cryptocurrency or use it to buy a car, you will see some kind of loss. And no taxes will be owed on these losses. You might even be able to use these losses to offset other taxes you owe from other investments.
If you ever sell your crypto for a profit, then you will need to report that sale and pay taxes on it just like any capital gains. Selling your cryptocurrency at a loss can be treated as an ordinary expense, but only if the loss is more than $3,000. If not, this lost investment cannot be deducted from your taxes.
What You Have to Report on Your Tax Return
To report crypto taxes, here are five basic steps involved:
- Compute your taxes for cryptocurrencies. You need to know how much money you may have gained or lost.
- Once you’ve computed your taxes, create the tax form for cryptocurrency: Form 8949.
- On your Form 8949, you’ll list the total of all cryptocurrency transactions on your 1040 Schedule D.
- If you are making money with cryptocurrency, then put your totals on the 1040 Schedule 1; if you are self-employed and working with crypto, use Schedule C.
- After you fill in the rest of your tax return, you can file it, and then it is done.In the US, to pay taxes on cryptocurrency, you need to fill out a form called IRS Form 8949, Schedule D, and fill in 1040 Schedule 1 and/or 1040 Schedule C if needed.
How Do Capital Gains Taxes Work?
If you are holding cryptocurrency, the tax depends on how long you have held it and your final yearly income.
- Short-term capital gains If you owned Bitcoin or other cryptocurrencies for one year or less, any gains from the sale of these assets would be taxed at your regular income tax rate.
- Long-term capital gains If they were sold after a period longer than 12 months, then it would be considered a long-term capital gain. Long-term capital gain tax is lower than most income taxes. You pay the property tax each year, depending on how much money you make.
If you obtain crypto by mining it, receiving it as payment for goods or services, or unexpectedly receive some as a promotion, it is taxed as part of your regular taxable income. You have to pay taxes on the value of crypto on the day you received it.
Suppose you keep the same Bitcoin and other cryptocurrencies as what you mined or earned from these activities. Its value increases and is worth more than before. And based on how long you’ve held it for already, there are taxes to be paid at a certain point in time.
How Are Crypto Mining and Staking Taxed?
Crypto mining and staking have many tax implications, so it is important to keep track of the date you mined or received rewards for crypto staking. If you mine cryptocurrency coins, then they are subject to income taxes.
As per IRS guidance, cryptocurrency mining is to be considered as ordinary income through the total market value of the cryptocurrencies at the date of acquiring. It signifies that mining profits are reported as taxable income and not capital gains.
Also, cryptocurrencies that you get from staking should be recognized as income. You should know the cost basis of any crypto that you get from staking.
How to Calculate Crypto Mining and Staking taxes?
Reporting your crypto to the IRS is a little different than reporting stocks or real estate. You must remember the fair market value of the crypto every time you received mining and staking rewards, and then report this information on your tax return for that year.
If you are not writing down when and how much money you earn from mining, that is fine. Many people are using software to automatically figure out the fair market value of your mining data.
Tax Rules for Buying and Selling Crypto
When you purchase Bitcoin and trade it for a profit, you are to pay capital gains taxes. If you buy and then sell it for dollars, or exchange it for another cryptocurrency, or use Bitcoin to get goods or services, taxes will apply.
Trading of Crypto Short-term vs. Long-term Gains
You’ll need to track all your crypto values, including coins you buy and when they are exchanged or sold.
If you bought Bitcoin for $40,000 and then sold it in exchange for $60,000, you’ll have a profit of $20,000. It is subject to tax at either short- or long-term capital gains rates depending on how long you held the Bitcoin. If you keep the Bitcoin for more than one year, you get preferred long-term capital gains rates of 0% to 20%.
The government has three tax rates for long-term capital gains. The first one is 0%. If you are making less than $40,000 (single) or $80,000 (married), then this is the rate that you will pay. The second one is 15%, and it applies to people who make more than $40,000 but less than $441,000 (single) or $80,000 but less than $496,000 (married). The third is 20%, and it applies to people who make more than that.
If you hold the cryptocurrencies for under one year, you are subject to short-term capital gains rates, which range from 0% – 37.
Exchanging One Crypto for Another
If you trade one cryptocurrency for another, you might get money. For example, if you buy $40,000 worth of Bitcoin and then trade it for Ethereum worth $60,000. You will have a taxable gain of $20,000. It doesn’t matter how long you hold the crypto or how long before trading it for other cryptocurrency.
Using Crypto for Goods or Services
When you trade cryptocurrency for goods or services, you are taxed on the increase in value that it has from the moment you purchase it until the time it is exchanged.
For example, if you had bought a Tesla with $100,000 worth of Bitcoin, you would need to know when that $100,000 in Bitcoin was purchased. When it was purchased for $40,000, then the price increased by 60%, and you will pay taxes on that increase.
If Bitcoin is held for over one year, it will be taxed as long-term capital gains. If Bitcoin was held for less than one year, it would be taxed as a short-term capital gain. It depends on how long you held it.
You get a tax loss when you buy and then sell Bitcoin or other cryptocurrencies at a reduced price than you purchased it for. This is when you might have an exchange from one type of cryptocurrency to another. You can use this tax loss to cover the cost of having made a loss on another trade.
Short-term losses can be utilized to offset short-term gains. Long-term losses can offset long-term gains. You can also use crypto losses to offset other gains from stocks or mutual funds. If you lose money in cryptocurrencies and other investments, you can use up to $3,000 of that loss to apply it to your taxes.
If you have losses on your taxes, you can carry them forward to future years and use them against gains that happen in the future.
Crypto Mining and Staking is Ordinary Income Taxed at Regular Rates
If you earn money from mining or staking cryptocurrency, then it is ordinary income for tax purposes. Mining and staking cryptocurrency are services that computers provide for a blockchain network. The computer owners typically receive coins from the network in exchange for their service.
So, for example, if you own a computer that does mining or staking, then you get crypto in exchange. You need to pay regular tax rates when you get paid in crypto, just like with dollars.
For tax purposes, the value of the crypto when it is received is what you use. When you buy crypto and then it’s worth more after some time, then you will have to pay taxes on the rise in value when it’s sold.
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Record Keeping and Reporting are Required
Taxing cryptocurrency is complex. This means that you need to take care to keep track of what you buy, sell and exchange. It is your duty to do this well and report it accurately. There are many apps for tracking crypto to help people who own cryptocurrency use it or trade it.
Cointracker.io and CryptoTrader.tax are two websites that can help you find companies that can help you pay the tax on your cryptocurrency.
You need to tell the IRS about gains and losses for your cryptocurrency. This is done using form 8949. You file a copy of it with your 1040 tax return. The IRS wants to know what you did with crypto, including which exchanges they are from, like Binance, Cash App, and Gemini.
Do not think that you can avoid taxes just by using a company outside of the US. You need to be careful because this can result in more tax reporting requirements to the IRS.
In sum, do not presume that trading and holding crypto abroad will exempt you from tax-reporting obligations. In fact, it makes it more complicated.
How to File Your Crypto Taxes
One of the first questions on the new 2020 Form 1040 tax return asks whether you engaged in any virtual currency transactions during the year. Reporting your crypto taxes may seem daunting at first, but it’s quite straightforward.
If you answer “Yes,” here is what you need to remember:
Keep Records of All Transactions
You need to track all your cryptocurrency transactions in a spreadsheet. You should include the date, how much you paid for it, and how much you sold it for. Also, include any receipt or invoice related to that transaction.
This may be a lot more challenging than it sounds. Some people trade cryptocurrency many times a year or even more. This can make it difficult to keep a trail of the trades and report them on a tax return.
If you trade cryptocurrencies on an investing platform or exchange, it may assist you with record keeping. You will get all the data that you need to file your own taxes or have someone else do it for you.
Use Software to Track Your Crypto Transactions
If you invest in cryptocurrencies through a platform or exchange that doesn’t keep track of your transactions, there are other ways for you to track them.
Software companies can help you find out about your transactions. They will tell you about all the transfers between your wallets and give reports on what they find.
Cointracker and Koinly are programs that connect to exchanges and cryptocurrency wallets to track your transactions, and they also help you fill out the forms to file your taxes for cryptocurrencies.
Fill Out the Proper Tax Forms
For tax purposes, cryptocurrencies are treated like other types of property, and you report them on whichever forms apply to your specific situation.
- Form 8949. This form will keep track of all of the transactions you have made with crypto. This should cover the total number of coins, the day you bought and sold the crypto, and its corresponding prices. Also, include your gain or loss for each transaction.
- Schedule D. This form tells you how much money you have made and lost. It also shows your total from all investments, including crypto.
- Schedule C. If you have mined coins, you should tell people if it was for a business or as a hobby. If you are running a crypto mining business, report it on Schedule C and deduct your expenses. But be careful because any extra income might mean that you have to pay self-employment taxes instead of just regular taxes.
- Schedule 1. If you want to report your crypto mining as a hobby, you will write it down on Line 8 of Schedule 1. You won’t pay any self-employment tax when doing this. But you can’t deduct any of the costs that a business usually can.
File Your Taxes
If you store your records in programs like CoinTracker or Koinly, you can connect them with your online tax software. You can then use the online tax software to file your state and federal taxes. If you want a one-stop service, TokenTax provides accounting services for both cryptocurrency and regular taxes.
Hire a Professional
Preparing for cryptocurrency taxes can be difficult, especially since the laws surrounding them are always changing. If you have earned a lot of money from cryptocurrencies, it might be worth hiring an accountant specializing in this type of tax work. This way, you will not have to worry about the IRS chasing you down later.
If you have to report your cryptocurrency transactions when you file your taxes, it is best to have a system for tracking everything. There are different ways you can do this, but one way is by using a third-party platform that lets you connect all of your exchanges and wallets. Other ways include doing this by hand, but it could be a lot of work and be more prone to error.
If you are planning on exchanging or using cryptocurrency, consider how long you’ve held onto it. If you’re nearing the one-year mark and will benefit from a lower capital gains tax rate, it might make sense to wait.