How much will my crypto be taxed?
The buying and selling of cryptocurrencies is taxable in the United States because the Internal Revenue Service (IRS) identifies digital assets as property rather than currencies following a 2014 ruling. The rate Cryptocurrency tax for federal taxes is the same as the capital gains tax rate, ranging from 0 to 37% depending on several factors. Capital gains taxes arise whenever a profit has been made from the sale of an asset.
Investors should note that cryptocurrency tax rates vary by jurisdiction.
Are crypto gains taxed and how much?
In addition to crypto trading and investment profits, interest earned on cryptocurrency staking, mining, and airdrops would also be taxed as ordinary income in tax brackets accordingly.
For cryptocurrency miners, the income generated in exchange for this work would also be taxed based on the total value of the digital assets obtained through mining.
If you received payment for goods and services in digital currencies, the payment also counts as taxable income. If you converted or traded cryptocurrencies, for example Ethereum to Bitcoin, you would also be taxed on any earnings you made during the transaction. Your Bitcoin tax rate would depend on several factors, which will be discussed in more detail in this article.
Activities such as transferring digital assets between exchanges, purchasing cryptocurrencies, donating digital currencies, and donating virtual assets are not considered taxable events.
How is cryptocurrency taxed?
Good news for those who are not taxed. The tax rates specific to the new asset class depend on three main factors in the United States.
- The method used to calculate the earnings.
- How long have the parts been kept before they are sold.
- Global annual income excluding cryptocurrencies and your tax status.
There are two methods of accounting for capital gains for cryptocurrencies that could give very different results. After determining the profits according to the accounting method chosen, they would be classified as long-term or short-term capital gains depending on the period of ownership of the digital assets. Short-term earnings would be added to your regular income and subject to your regular income bracket.
On the other hand, if you had suffered losses when you sold or spent your cryptocurrencies, you owed nothing in taxes.
How to calculate how much you owe in taxes
The IRS says investors can identify the coins they are selling as long as there are detailed records. Under the basic highest cost method, also known as highest in, first out (HIFO) accounting, you may be subject to lower taxes calculated with the least amount of earnings.
If you do not have a detailed trading history, the default accounting method will automatically be First-in-First-out (FIFO), where it would be assumed that you are selling the first purchased unit of crypto asset regardless of the price.
After recording the gains using the preferred accounting method, the gains are classified as short-term or long-term capital gains based on how long the coins have been held.
Short-term gains are calculated when you hold the cryptocurrencies for less than 12 months. These capital gains also count for cryptocurrency tax and are then added to your regular income and would be subject to your regular tax bracket.
Your capital gains would be considered long term if you sold your tokens after keeping them for more than 12 months. These gains would be subject to crypto taxes ranging from 0% to 20% tax brackets.
For an individual who realized capital gains of $ 40,000 or less during the year, the investor would be subject to a 0% tax rate. However, individuals who earned more than $ 40,000 during this period would be subject to a 15% tax rate.
How to minimize taxes when trading crypto
To put it in perspective, in order to minimize taxes when trading crypto, investors should use the HIFO method to account for capital gains. For example, if an investor bought two Bitcoins – one for $ 3,000 and one for $ 10,000 – in 2020 and sold both BTCs in early 2021 for $ 40,000, the FIFO method would result in gains of $ 37,000, while the HIFO method would accumulate capital gains of $ 30,000.
This means that your Bitcoin taxes depend on using the HIFO or FIFO accounting method.
If you encounter losses when trading cryptocurrencies, you can also use them to offset capital gains. However, investors should note that there are still certain limits in capital gains compensation set by the IRS.
Other credits, exemptions and deductions could also reduce your overall taxable income.
How to declare your crypto taxes
For inventors who have interacted with cryptocurrencies, this would most likely result in a taxable event. When filling out tax forms, the IRS has placed a question at the top of Form 1040 asking if you have received, sold, traded, or acquired a financial interest in virtual assets. This means that investors can no longer pretend they didn’t know the need to report crypto capital gains.
- To report digital asset capital gains for your tax return, you’ll need to put together a list of all of your trades and transactions, including any 1099 forms that crypto exchanges have sent you.
- Then use the aforementioned accounting methods to calculate your capital gains and losses.
- You will also need to complete IRS Form 8949 for all events considered taxable property.
- Then transfer the totals from Form 8949 to Form 1040 Appendix D.
- Finally, you will also need to complete any outstanding cryptocurrency income on the Form 1040.
Failure to report income, including that from the sale of digital assets, could result in the imposition of penalties by the IRS. Therefore, investors should take note of cryptocurrency taxes. It would be wise to consult a tax planner regarding cryptocurrency taxes and individual reporting obligations.