How Is Cryptocurrency Taxed? Here's What You Need to Know | Kiplinger (2022)

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If you think the lack of government oversight means that cryptocurrency is not taxed, you're in for a big surprise.

by: Riley Adams

July 14, 2021

Cryptocurrency has headlined many news articles, served as the subject of social media posts, and gained significant traction in mainstream culture. Bitcoin, the first digital currency, has grown exponentially in recent years, with a total market capitalization growing from a modest $10 billion in July 2016 to over $1.1 trillion earlier this year.

If you've held on to your Bitcoin since then, you've obviously learned how to increase your net worth and now have a sizable unrealized capital gain in your portfolio. But what happens if you choose to convert this erstwhile investment into an actual currency used to buy goods and services?

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You're going to feel a tax pinch. But do you know how much you'll owe Uncle Sam? To answer that question, you need to understand what cryptocurrency is and how your tax liability is determined every time you buy it, sell it, or mine it.

(Video) DO YOU HAVE TO PAY TAX ON CRYPTOCURRENCY? (UK)

What is Cryptocurrency?

Cryptocurrency is a type of virtual currency that uses blockchain cryptography to secure transactions. It also has no central bank overseeing the supply of currency available in the market.

Unlike centralized electronic money or traditional paper money systems, called fiat currencies, cryptocurrencies rely on distributed digital ledgers to secure and verify transactions. (Well-known fiat currencies include dollars or euros.)

This blockchain technology anonymously logs all transactions ever recorded and acts like a continuously-updated checkbook universally accessible by all.

There are many different types of cryptocurrency, but Bitcoin is the best-known, closely followed by coins including Ethereum and even Dogecoin.

There are also ways to receive cryptocurrency beyond simply buying it on an exchange. For example, some cryptocurrencies use "mining" as a process to solve complicated equations to record data on the blockchain. To incentivize miners to participate, they may receive payment in new crypto tokens. You can also receive cryptocurrency through a marketing promotion on an exchange or through an "airdrop."

How Cryptocurrency is Treated for Tax Purposes

Many people are quick to point out how cryptocurrency is not backed by any government and, thus, subject to less regulation than fiat currencies like the dollar or euro. This lack of oversight has led many to believe that cryptocurrency investors are participating in elusive and anonymous transactions that allowed them to avoid paying taxes. However, this belief is absolutely false. In the United States, crypto exchanges must report user activity on gains and losses to the Internal Revenue Service (IRS), and cryptocurrency is taxed in much the same way as traditional stocks or similar assets.

(Video) How is Cryptocurrency taxed in the UK? - Tax on Bitcoin UK

Cryptocurrency is considered "property" for federal income tax purposes, meaning the IRS treats it as a capital asset. This means the crypto taxes you pay are the same as the taxes you might owe when realizing a gain or loss on the sale or exchange of a capital asset.

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For instance, when you purchase a capital asset – be it a stock, bond, exchange-traded fund, house, Bitcoin, or any other investment – you initiate a basis equal to your cost to acquire it. When it comes time to sell your capital asset, you simply compare your net sales proceeds to your original basis to determine whether you have a capital loss or a capital gain. If the proceeds exceed your original cost basis, you realize a capital gain. When reversed, you've locked in a capital loss.

Calculating Taxes When You Buy and Sell Cryptocurrency

When you buy and sell cryptocurrency, comparing your net proceeds to your cost basis isn't the only step in figuring how much you owe in crypto taxes. You also need to consider the length of time you held the asset, as this determines the type of capital gain or loss you recognize. Depending on how long you hold your cryptocurrency, your gains or losses will be considered "short-term" or "long-term." That distinction will play a big role in how much you have to pay in crypto taxes.

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(Video) Crypto Taxes 101: The Complete Step-by-Step Crypto Tax Guide — (CryptoTrader.Tax is now CoinLedger)

  1. Short-Term Capital Gains and Losses. When you buy and sell an asset within a 365-day period, you recognize either a short-term capital gain if it sold for more than what you paid for it or a short-term capital loss if it sold for less than what you paid for it. Short-term gains and losses are subject to the same tax rates you pay on ordinary income, such as wages, salaries, commissions, and other earned income. The IRS has seven tax brackets for ordinary income ranging from 10% to 37% in 2021.
  2. Long-Term Capital Gains and Losses. If you buy an asset and sell it after one year, the resulting difference between your net sales proceeds and your cost basis is a long-term capital gain or loss. Typically, you'll pay less tax on a long-term gain than on a short-term gain because the rates are generally lower. Currently, there are three tax rates for long-term capital gains – 0%, 15%, and 20%. The rate you pay depends on your income.

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You can also offset capital gains with capital losses. However, the offset must first apply to gains and losses of the same type. For example, short-term losses first lower your short-term gains, while long-term losses reduce your long-term gains. Any remaining net losses can be used to offset the other kind of capital gain (e.g., remaining short-term losses can offset remaining long-term capital gains). If you still have any capital losses available, they can be used to offset up to $3,000 of ordinary income. After that, any remaining capital loss is rolled over to the following year.

Other Ways to Obtain Cryptocurrency

There are other ways to obtain virtual currency beyond simply buying it. For instance, you can earn cryptocurrency by mining it. You can also receive it as a promotion for goods or services, for free from cryptocurrency platforms, or for staking cryptocurrency. This latter activity allows you to earn interest by purchasing and setting aside your tokens to become an active validating node for a crypto network. In these situations, you owe tax on the entire value of the crypto on the day received and it counts as ordinary income.

Using Cryptocurrency to Pay for Goods and Services

A complicating factor for crypto investors arises when they attempt to use their virtual currency to pay for goods and services. The IRS chose to treat cryptocurrency as property in 2014 because most people only saw it as a capital asset at the time. Now, as more companies choose to accept cryptocurrency as a form of payment and people begin to adopt it as a unit of account, many people have begun to see it as a viable alternative currency. However, the current tax treatment of crypto impedes the wholesale replacement of fiat currency.

With traditional fiat currencies, you simply pay for your purchase and have no tax consequences related to cost basis or the value of your currency at the time of payment. However, cryptocurrency users must deal with capital gains and losses in addition to whatever sales taxes they might face at the point of sale.

For example, let's imagine you bought $10 worth of Bitcoin two years ago and it has since appreciated to $100 in value. If you sold it on an exchange, you'd have $90 of realized long-term capital gains, just like you would with any other capital asset.

If you instead used that same $100 worth of Bitcoin to buy groceries from the supermarket, you'd still have to pay long-term capital gains taxes on the $90 difference between appreciated value and your cost basis.

As you can imagine, tracking your capital gains and losses for everyday transactions like this can become tedious and a downright impediment to replacing fiat currency altogether.

(Video) Crypto & Bitcoin Taxes Explained - Everything You Need To Know | CryptoTrader.Tax (CoinLedger)

FAQs

How is crypto taxed by the IRS? ›

Bitcoin held as capital assets is taxed as property

Like stocks or bonds, any gain or loss from the sale or exchange of the asset is treated as a capital gain or loss for tax purposes.

Do you have to report every crypto transaction on taxes? ›

TurboTax Tip: Cryptocurrency exchanges won't be required to send 1099-B forms until tax year 2023. If you don't receive a Form 1099-B from your crypto exchange, you must still report all crypto sales or exchanges on your taxes.

How much Crypto do you have to report on taxes? ›

Crypto exchanges are required to file a 1099-K for clients who have more than 200 transactions and more than $20,000 in trading during the year.

How can I avoid paying crypto taxes? ›

Here's how.
  1. Hold on. The easiest way to avoid paying crypto taxes? ...
  2. Take advantage of tax-free thresholds. ...
  3. Offset gains with losses. ...
  4. Invest crypto into an IRA, pension or annuities fund. ...
  5. Use the annual gift tax exclusion. ...
  6. Change your tax rate. ...
  7. Donate to charity. ...
  8. Offload crypto assets to your spouse.
18 Aug 2022

Do I have to report crypto on taxes if I made less than 1000? ›

The short answer is yes. The more detailed response is still yes; you have to report and potentially pay taxes on any crypto transaction that results in a taxable event with gains or losses.

Do I need to report crypto if I didn't sell? ›

Yes, there are several scenarios where you receive income as cryptocurrency, which needs to be reported even if you don't sell it. For example, if you receive crypto from earning interest, staking rewards, an airdrop, or a salary, you need to report that income, even if you don't sell the coins you received.

Do you have to pay taxes on Bitcoin if you don't cash out? ›

The IRS classifies crypto as a type of property, rather than a currency. If you receive Bitcoin as payment, you have to pay income taxes on its current value. If you sell a cryptocurrency for a profit, you're taxed on the difference between your purchase price and the proceeds of the sale.

Can you write off crypto losses? ›

If you sell cryptocurrency in a taxable investment account in 2022, you'll be responsible for paying taxes on your profits. You'll also need to report your crypto losses if you want to snag a tax deduction. You can report your capital gains and losses from your crypto transactions on IRS crypto tax Form 8949.

What happens if you dont report crypto? ›

After an initial failure to file, the IRS will notify any taxpayer who hasn't completed their annual return or reports. If, after 90 days, you still haven't included your crypto gains on Form 8938, you could face a fine of up to $50,000.

Is crypto tax on profit? ›

In simple words, a loss from Bitcoin assets cannot be set off from income in ApeCoin or any other virtual digital assets as a matter of fact. A tax of 30% is levied on any income from the transfer of crypto assets. The new tax provisions are set to come into effect from April 01, 2022.

Does Coinbase send you a 1099? ›

This is income paid to you by Coinbase, so you may need Coinbase's tax identification number (TIN) when you file your taxes: 45-5293997. Please note: Coinbase will not provide a Form 1099-K or 1099-B for the 2021 Tax Season for trades on Coinbase.

Which country has no tax on cryptocurrency? ›

For both businesses and individual investors, the Cayman Islands is a crypto tax haven. The authorities there impose no corporate tax on businesses and no income tax nor capital gains tax on residents.

How is crypto tax calculated? ›

Estimating your crypto taxes for gains and losses takes just three steps
  1. Find out how much you made selling crypto. To find your total profits, multiply the sale price of your crypto by how much of the coin you sold: ...
  2. Figure out whether you have a short-term or long-term gain. ...
  3. Estimate your taxes.

How much can you cash out on Coinbase? ›

Coinbase Pro account holders have a daily withdrawal limit of $50,000/day. This amount applies across all currencies (for example, you can withdraw up to $50,000 worth of ETH per day). To be considered for higher withdrawal limits, go to your Limits page and select Increase Limits.

Do I need to report crypto if less than 600? ›

If you earn $600 or more in a year paid by an exchange, including Coinbase, the exchange is required to report these payments to the IRS as “other income” via IRS Form 1099-MISC (you'll also receive a copy for your tax return).

What happens if you don't declare capital gains? ›

If you fail to report the gain, the IRS will become immediately suspicious. While the IRS may simply identify and correct a small loss and ding you for the difference, a larger missing capital gain could set off the alarms.

Does Coinbase report losses to IRS? ›

Does Coinbase report to the IRS? Yes. Coinbase reports your cryptocurrency transactions to the IRS before the start of tax filing season. As a Coinbase.com customer, you'll receive a 1099 form if you pay US taxes and earn crypto gains over $600.

Will the IRS know if I don't report crypto gains? ›

Purchasing Crypto With Dollars

If your only crypto-related activity this year was purchasing a virtual currency with U.S. dollars, you don't have to report that to the IRS, based on guidance listed on your Form 1040 tax return.

Can IRS seize your crypto? ›

IRS may seize crypto valued at billions of dollars in 2022, according to official. The Internal Revenue Service could seize cryptocurrency valued at billions of dollars that's linked to tax fraud and other crimes in the coming year, according to the agency's head of criminal investigations.

How much is capital gains tax on crypto? ›

Long-term capital gains tax for crypto
SingleMarried, filing jointly
15% long-term capital gains tax rate if your taxable income is:$41,676 to $459,750.$83,351 to $517,200.
20% long-term capital gains tax rate if your taxable income is:$459,751 or more.$517,201 or more.
1 more row
29 Aug 2022

When did crypto become taxable? ›

In March 2014, the IRS issued Notice 2014-21 (the Notice), stating that cryptocurrency was to be treated as property, rather than currency for US federal income tax purposes.

Is there a wash rule for crypto? ›

Cryptocurrency is classified as property by the IRS and is currently not subject to the wash sale rule.

Why is crypto crushing? ›

Experts say this is because of the wider global climate. It's not just in the crypto world things are not looking good. Recession looms, inflation is soaring, interest rates are rising and living costs are biting. Stock markets are wobbling too, with the US S&P 500 now in a bear market (down 20% from its recent high).

Can you claim stolen crypto on taxes? ›

Key Takeaways. The Tax Cuts and Jobs Act of 2017 limited individual casualty and theft deductions to federal disasters, so crypto hacks or scams are unlikely to be eligible.

Has anyone been audited for crypto? ›

Many crypto traders got CP2000 audits because they failed to report on their return a 1099-K from a crypto exchange.

Who have to pay crypto taxes? ›

If you have gained crypto tokens as a result of mining, it will be taxable under business income. The second type comes in, when you have HODL-ed the crypto and have gained profits from it. Then you have to pay the 30% tax when you are selling the asset.

How does IRS track crypto gains? ›

If you have more than $20,000 in proceeds and at least 200 transactions in cryptocurrency in a given tax year, you should receive a form 1099-K reflecting your proceeds for each month. Exchanges are required to create these forms for users who meet these criteria. A copy of this form is sent directly to the IRS.

Does converting crypto on Coinbase get taxed? ›

Transferring crypto to yourself: Transferring crypto between wallets or accounts you own isn't taxable. You can transfer over your original cost basis and date acquired to continue tracking your potential tax impact for when you eventually sell.

Does crypto provide tax forms? ›

Unlike many other exchanges, Crypto.com provides tax reports for its users. Crypto.com can provide capital gain/loss reports, an income report and a variety of IRS specific forms like Form 8949.

Do I have to pay taxes on crypto if I don't cash out? ›

The IRS classifies crypto as a type of property, rather than a currency. If you receive Bitcoin as payment, you have to pay income taxes on its current value. If you sell a cryptocurrency for a profit, you're taxed on the difference between your purchase price and the proceeds of the sale.

What happens if you don't file crypto taxes? ›

If you don't report taxable crypto activity and face an IRS audit, you may incur interest, penalties, or even criminal charges. It may be considered tax evasion or fraud, said David Canedo, a Milwaukee-based CPA and tax specialist product manager at Accointing, a crypto tracking and tax reporting tool.

How is crypto taxed 2022? ›

Long-term capital gains tax for crypto

Depending on your income and filing status, you'll generally either pay 0%, 15% or 20% on your long-term gains. 0% long-term capital gains tax rate if your taxable income is: $0 to $41,675. $0 to $83,350.

Does Coinbase report Gains to IRS? ›

Yes. Coinbase reports your cryptocurrency transactions to the IRS before the start of tax filing season. As a Coinbase.com customer, you'll receive a 1099 form if you pay US taxes and earn crypto gains over $600.

Can you write off crypto losses? ›

If you sell cryptocurrency in a taxable investment account in 2022, you'll be responsible for paying taxes on your profits. You'll also need to report your crypto losses if you want to snag a tax deduction. You can report your capital gains and losses from your crypto transactions on IRS crypto tax Form 8949.

Which country has no tax on cryptocurrency? ›

For both businesses and individual investors, the Cayman Islands is a crypto tax haven. The authorities there impose no corporate tax on businesses and no income tax nor capital gains tax on residents.

What is a taxable crypto transaction? ›

Yes, your Bitcoin, Ethereum, and other cryptocurrencies are taxable. The IRS considers cryptocurrency holdings to be “property” for tax purposes, which means your virtual currency is taxed in the same way as any other assets you own, like stocks or gold.

Has anyone been audited for crypto? ›

Many crypto traders got CP2000 audits because they failed to report on their return a 1099-K from a crypto exchange.

Can IRS seize your crypto? ›

IRS may seize crypto valued at billions of dollars in 2022, according to official. The Internal Revenue Service could seize cryptocurrency valued at billions of dollars that's linked to tax fraud and other crimes in the coming year, according to the agency's head of criminal investigations.

Do you have to report crypto under $600? ›

If you earn $600 or more in a year paid by an exchange, including Coinbase, the exchange is required to report these payments to the IRS as “other income” via IRS Form 1099-MISC (you'll also receive a copy for your tax return).

How much tax do you pay on crypto USA? ›

Ordinary income tax: If you earn cryptocurrency — whether through your job, mining, staking, or airdrops — you'll recognize ordinary income subject to income tax. This can range from 10% - 37% depending on your income level. Meanwhile, cryptocurrency disposals are subject to capital gains tax.

How do I calculate my crypto gains? ›

You calculate crypto profit by subtracting the selling price from the cost price of the cryptocurrency. That is one of the simplest ways to calculate your profit and loss.

How much tax do I pay on my crypto calculator? ›

The income can be calculated by reducing the cost of acquisition, i.e. the purchase cost, from the consideration received on transfer of Bitcoin. The tax rate is 30% on such income.

Do I need to report crypto if I didn't sell? ›

Yes, there are several scenarios where you receive income as cryptocurrency, which needs to be reported even if you don't sell it. For example, if you receive crypto from earning interest, staking rewards, an airdrop, or a salary, you need to report that income, even if you don't sell the coins you received.

How does IRS track crypto gains? ›

If you have more than $20,000 in proceeds and at least 200 transactions in cryptocurrency in a given tax year, you should receive a form 1099-K reflecting your proceeds for each month. Exchanges are required to create these forms for users who meet these criteria. A copy of this form is sent directly to the IRS.

Why did Coinbase not send me 1099? ›

Coinbase stopped issuing Form 1099-Ks after 2020 because of the confusion they caused. Because the forms showed total transaction volume, 1099-Ks resulted in thousands of Coinbase customers receiving CP2000 letters from the IRS claiming they significantly underreported their income for the year.

Videos

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