Cryptocurrency and taxes. That has been an exciting topic for as long as crypto coins existed. Not anymore.
As cryptocurrency becomes a mainstream form of payment, the IRS is stepping up its enforcement efforts. In the past, the agency has been relatively slow to clamp down on digital currencies. But now, it’s taking a much firmer stance against those who have evaded taxes on their cryptocurrency earnings or failed to file altogether.
Cryptocurrency taxes – when do you need to pay them
It was about time governments took measures to control the crypto world. Taxes on crypto were implemented to ensure the full traceability of incomes and avoid money-laundering activities involving Bitcoin or Litecoin, for example.
Trading on the cryptocurrency market
The IRS confirmed that those who trade on the cryptocurrency market should pay taxes. If you make a short-term gain, or a long-term gain, taxes are due. In addition to this, whether you change one crypto coin to another or to fiat currency, taxes are due as well. You should keep track of all your transactions and stay updated with the latest tax laws.
If you keep your crypto assets for a long time, you are also due taxes. However, the rates might be a lot more favorable. If you’ve made less than $40,000 over the last year from holding, you owe 0% in taxes. Then you owe 15% up until the $445k bracket. From then on, you have to pay 20% in taxes.
Taxes on cryptocurrencies is a complicated area that requires significant discussion and understanding of how regulations apply to your specific situation. It’s worth noting that the IRS considers income from mining to be ordinary income – similar to receiving wages for work you do – and thus taxable at rates that vary between 10% and 37%. That isn’t that scary, though, as the tax is applied to your net income – all the electricity bills, repairs, mining equipment costs, etc., are taken into account.
In which cases is the tax being applied?
Let’s say you buy Litecoin for $100,000 today. But eventually, you want to sell your coins for $250,000 next year. Depending on when you plan to sell, you might be charged either 15% tax or a 24% tax. Not a slight difference at all.
A factor that complicates things
Every time you invest in cryptocurrency, you will have to monitor your progress. If you’re trading one cryptocurrency for another, you’re trading cryptocurrencies. Because you’re trading two different types of currencies, this is a taxable event. Each time you trade one type of currency for another, it’s considered a taxable event. This means that you must report any gains or losses to the IRS in U.S. dollars. So make sure to keep track of how much you’ve gained or lost every time you trade cryptocurrencies.
P.S. Make sure you have filled form 8949 correctly.
Is it all doom and gloom?
Not everything looks so bad. As with every type of investment, there is a legal way to reduce your capital gains, in order to report smaller profits to the IRS.
- Hold your investments for at least one year – If you sell your investment before the one-year holding period is up, you might face high capital gains tax rates. It makes sense to set aside enough cash to pay for those taxes, especially if you made high returns on your investment
- Tax loss harvesting – With the high volatility of cryptocurrencies, you might be looking for ways to reduce your tax liability. Tax-loss harvesting can help you do just that. Designed to reduce short- and long-term capital gains of the same type, tax-loss harvesting is a popular strategy that allows you to offset gains and use the remainder to reduce other types of taxes.
- Giving crypto as a gift – Under the IRS gift tax rules, you can give Bitcoin or other cryptocurrencies valued at less than $15,000 without having to worry about taxes. This $15,000 tax exemption is per recipient and applies for 2020 and 2021. For future tax years, cryptocurrency gifts may be subject to a lower annual exclusion amount.
The IRS has declared that cryptocurrency is property. That means that every purchase you make with your favorite digital currency, whether it’s Bitcoin, Ethereum, or another altcoin, is taxed as a capital gain. The taxes you owe depending on the circumstances of your trade.
The early days of cryptocurrency were a tax-free paradise. Taxes weren’t a hot topic, and crypto investors didn’t feel the need to calculate BTC taxes. But things have changed dramatically. But no matter what happens, there is always a way to reduce your tax burden.