2021 was a big year for cryptocurrencies, with everything from laser eyes to all-time highs. More than 10% of Americans traded cryptocurrency in the previous year; if you’re one of them, you’re probably wondering how your trades and other crypto activity will affect your crypto taxes.
U.S. taxpayers are required to report cryptocurrency sales, conversions, payments, and income to the IRS and, where applicable, state tax authorities, and each of these transactions have different tax implications. This article will teach you when your cryptocurrency is taxed and how your activity may affect your crypto taxes. Let’s get started.
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What Are Crypto Taxes?
Cryptocurrency is classified as a digital asset, and the IRS treats it similarly to stocks, bonds, and other capital assets. The money you make from crypto, like these assets, is taxed differently, either as capital gains or as income, depending on how you got it and how long you keep it.
To determine whether you owe crypto taxes, consider how you used your cryptocurrency in 2021. Taxable events are transactions that result in a tax. Those that do not are referred to as non-taxable events. Let us break them down:
What Is Not taxable?
- Buying crypto with cash and holding it: Buying and containing cryptocurrency is not taxable in and of itself. When you sell, the tax is frequently incurred, and the gains are “realised.”
- Donating crypto to a qualified tax-exempt charity or non-profit: You may be able to claim a charitable deduction if you donate cryptocurrency directly to a 501 (3) charitable organisation, such as GiveCrypto.org.
- Receiving a gift: If you’re lucky enough to receive cryptocurrency as a gift, you won’t have to pay crypto taxes on it until you sell it or engage in another taxable activity like staking.
- Giving a gift: How considerate! You can make tax-free gifts of up to $15,000 per recipient per year (and higher amounts to spouses). If the value of your gift exceeds $15,000 per recipient, you must file a gift tax return (which generally does not result in any current tax liability). If you transfer cryptocurrency to someone else without purchasing goods or services, it may be considered a gift, even if you didn’t intend it to be that way.
- Transferring crypto to yourself: Transferring cryptocurrency between wallets or accounts is not taxable. You can carry over your original cost basis and acquisition date to continue tracking your potential tax impact when you sell.
What Is Taxable As Capital Gains?
- Selling crypto for cash: Did you sell your cryptocurrency for US dollars? If you sell your assets for more than you paid for them, you’ll have to pay crypto taxes on the difference. You may be able to deduct a loss from your crypto taxes if you sell at a loss.
- Converting one crypto to another: When you use bitcoin to buy ether, for example, you must technically sell your bitcoin before purchasing the new asset. The IRS considers this to be taxable because it is a sale. If you sold your bitcoin for more than you paid for it, you’d have to pay crypto taxes on the difference.
- Spending crypto on goods and services: If you use bitcoin to buy a pizza, for example, you will almost certainly have to pay crypto taxes on the transaction. To the IRS, spending cryptocurrency isn’t all that different from selling it. Before you can exchange the asset for a good or service, you must first sell it, and selling crypto subjected it to capital gains crypto taxes.
What Is Taxable As Income?
- Getting paid in crypto: Russell Okung, an NFL offensive tackle, was one of a few big names who took their paychecks in bitcoin in 2021 — and he’s probably paying income tax on it. If you followed Okung’s advice and were paid in cryptocurrency by an employer, your cryptocurrency will be taxed as compensation in accordance with your tax bracket.
- Getting crypto in exchange for goods or services: If you accept cryptocurrency as payment for a good or service, you must report it to the IRS as income.
- Mining crypto: If you mine cryptocurrency, you’ll almost certainly have to pay crypto taxes on your earnings based on the fair market value (often the price) of the mined coins at the time they were received. Crypto miner for profit is taxed as self-employment income.
- Earning staking rewards: Staking rewards are taxed in the same way mining proceeds are: crypto taxes are calculated based on the fair market value of your rewards on the day you received them.
- Earning other income: Certain cryptocurrencies may provide a profit if held. This is regarded as taxable income. Although this is sometimes referred to as interest, the IRS treats it differently than bank interest.
- Getting crypto from a hard fork: Taxes on cryptocurrency obtained through a hard fork vary depending on how you use the asset when it is available for withdrawal from your exchange and other factors. See the latest IRS guidance on hard forks.
- Getting an airdrop: A crypto company may provide you with airdrops as part of a marketing campaign or giveaway. Receiving an airdrop is taxable as income, and you must report the amount on your tax return. See the latest IRS guidance on airdrops.
- Receiving other incentives or rewards: This isn’t an exhaustive list; there are a variety of reasons why you might receive free cryptocurrency. These can include Coinbase Earn rewards or incentives such as receiving $5 in bitcoin for referring a friend to a crypto exchange. In any case, you must report these as income.
How Much Crypto Taxes You Have To Pay?
So it appears that some of your cryptocurrency activity is taxable — what now? Calculating your income, gains, and losses can help you estimate how much tax you’ll owe. This is what it means:
Calculating Crypto Income
If you’re a taxpayer in the United States, you’re probably used to seeing your federal and state income taxes deducted from your pay stubs. The cryptocurrency you receive as income (mining, staking, and rewards) is also subject to these crypto taxes, which are not usually deducted or withheld. When you file it, you’ll generally owe the income tax rate applicable to your tax bracket. A word of caution: If you’ve made a lot of money from cryptocurrency, it may affect your tax bracket, and you may end up paying a higher tax rate on some of your earnings.
Visit IRS.gov to know the latest guidance on federal income taxes.
Calculating Capital Gains and Losses
To determine how much you gained or lost, you must first determine how much cryptocurrency you began with. This is referred to as your cost basis.
When you sell your cryptocurrency, you can deduct your cost basis from the sale price to determine whether you have a capital gain or loss. You have a capital gain if your proceeds exceed your cost basis. If not, you will suffer a capital loss.
Short-term vs Long-term Capital Gains
Capital gains crypto taxes are levied both at the federal and state levels (where applicable). They can be long-term or short-term, and the length of time you’ve held your crypto affects how much tax you’ll owe. If you held onto your cryptocurrency for more than a year before selling, you would typically pay a lower rate than if you sold right away.
- Long-term gains are taxed at a reduced capital gains rate: These rates (0 per cent, 15%, or 20% at the federal level) vary depending on your income. Higher-income taxpayers may be subject to the 3.8 per cent Net Investment Income Tax on gains or other income.
- Short-term gains are taxed at your ordinary-income rate: It is typically a higher, unfavourable rate.
Remember that taxable events occur when you realise losses or gains, which means you sold your cryptocurrency for cash, converted it to another cryptocurrency, or spent it on a good or service. If you still own the original shares, the gains are unrealised.
Understanding Your Capital Losses
You have incurred a capital loss when you sell an asset for less than what you paid for it. However, losses can be used to your advantage. You can use losses to offset other capital gains (including those from non-crypto assets such as stocks) you may have had during the year, potentially lowering your overall tax bill.
If you have more losses than gains or no gains at all, the most you can declare each year to offset other income is $3,000. Any remaining amount is carried forward to subsequent years until the entire amount of the loss is applied.