If you’re looking for a helpful guide to crypto taxes, you’re in the right place. It’s completely understandable that you weren’t aware of crypto taxation regulations. It is pretty new for us, as well as the financial regulators.
For example, the American IRS has brandished a question on the top of their Income Tax form in clear words, asking “At any point of time in 2020, did you send, receive, exchange or otherwise acquire any financial interest in any virtual currency?”
The wording is purposefully vague to cast a wide enough net to include any and all types of virtual currencies – present and future – into the tax bracket.
So, you are supposed to pay taxes on your crypto trades. Yes, mining, airdrops, and forks too.
Now that we’ve understood this very clearly, let’s unpack this further.
So what are Crypto Taxes?
One does not pay any tax while buying any virtual currency. Taxation only comes in once you’ve sold it. Since the IRS considers virtual currencies as property, it treats it like any other property you hold and taxes you based on the capital gains made.
You will pay taxes on the capital gains made on the transaction.
Capital gain = selling price – buying price – fees
Depending on how long you’ve held the coin, under or over a year, your gains will be taxed either with the short, or the long term rate.
Cryptocurrency taxation is a combination of capital gains and income tax.
The IRS taxes you on the capital gains made –
- Selling crypto
- Trading or exchanging crypto
- Trading with stablecoins
- Participating in ICOs (you are taxed only when you receive your tokens)
- Paying for goods and services online with crypto
- Margin Trading
- Futures/ Contracts/ Options trading with crypto
The IRS will tax you as income tax when –
- Mining Crypto
- Interest from DeFi/ Lending /Staking / Masternodes
- Airdrops and Forks
- Signups and referral bonuses
- Getting paid in virtual currency
The following are tax free –
- Token and coin swaps
- Gifting Crypto – Tax-free up to $15000
- Transferring between your own wallets
How do we calculate our crypto taxes?
Crypto transactions classified as income tax will be taxed as per the income tax slab of that particular year.
As a high frequency or even a hobbyist trader, most of your transactions would be classified under capital gains.
If you sell after holding it for under one year, its the same rate as your income tax.
If you sell after holding it for over one year, you would pay the long term tax rate, which is actually lower than the income tax rate.
The long term rates for 2020 are:
|Rate||For Unmarried Individuals, Taxable Income Over||For Married Individuals Filing Joint Returns, Taxable Income Over||For Heads of Households, Taxable Income Over|
Unlike stocks and bonds where you may be sent a 1099 by your brokerage firm, when it comes to Bitcoin and other cryptocurrencies, for all intents and purposes the onus of tax reportage lies completely with you.And for this purpose, bear.tax came into existence.
Here’s what you need to file your crypto taxes
Form 8949 – Used for capital gains/losses. Fill in all your long term and short term holdings.
Schedule D – Used for capital gains/losses. It’s a summary of your Form 8949
Schedule 1 – Form 1040 – Used for income from cryptocurrencies – Answer “Yes” for the question on top of the form. Fill in additional crypto income on line 8 of this form.
Or just use bear.tax! We’ll help you out.
Here’s how you can save on your taxes
Make sure you’ve held the crypto asset for more than 12 months before you donate it to a charity, to avail a tax deduction equal to the market value of the asset at the time of donation. Furthermore you would not pay any tax on the capital gains of the donated “property”
Tax Loss Harvesting
Since the IRS considers crypto assets as property, they are not yet subject to wash sale rules. Sell your loss positions so you could harvest losses for tax purposes and swiftly turnaround to the same position without having to wait for 30 days. Offset your crypto and other capital gains with this. It is also important to note that if the coin gains price heavily in future, this lower price that you bought it back then for, will be the cost basis. This is a risk involved or a trade off to save taxes now vs in the future.
Move Crypto capital gains in opportunity zones
If you’ve got a large amount of unrealised crypto gains, move those profits into a Qualified Opportunity Fund.
Hold your crypto!
5 years – 10% initial crypto tax gain will be tax free.
7 years – Additional 5% becomes tax free.
10 years – You can completely avoid capital gains tax.
Trade crypto in a Self-Directed IRA
Although you cannot save taxes directly you could defer them until retirement. The advantage you gain here is by compounding crypto gains back into your portfolio without having to pay tax on them right now. Use this to increase your overall return exponentially in the long run. Additionally, when you take out funds at your retirement, you would benefit from a lower tax rate as well.
Keep in mind the following
- Tax rules change often. Keep an eye out for any changes so you don’t get caught off-guard.
- Losses up to $3000 can be written off.
- Bring in an expert when needed. Or get bear.tax, we’ll take care of it for you, so you can focus on your trades.
- Holding periods matter and can make a difference in your tax amount.
There is one silver lining with the IRS coming in and regulating cryptocurrencies. It has legitimized virtual currencies giving them an authoritative backing, encouraging large institutional investors.
This is great for everyone involved. The only way to go is up, and being on top of your taxes saves you money now, and bureaucratic complications later.