How to pay your taxes on cryptocurrencies in 2021? (Promoted)

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Cryptocurrencies have experienced a recent boom. After various coins hit their all-time highs (ATH), a large number of new people started buying them. Whether you are a serious investor or an occasional buyer / user of cryptocurrencies, you should be aware of the taxes that apply to them.

In the United States, cryptocurrencies are considered goods. They are taxable like any other property, including fixed assets like bonds and stocks.

Who does this advice apply to or apply to?

  • If you conduct cryptocurrency transactions to receive or send payments for services or products;
  • If you have invested in cryptocurrencies, regardless of the time period, with the expectation of an interest-based gain;
  • If you mine cryptocurrency or receive cryptocurrency rewards as a result of freezing or staking your cryptocurrencies; or
  • If you receive cryptocurrencies in the form of airdrops or during hard forks of existing cryptocurrencies;

You are then eligible for taxes in the United States.

In a nutshell, the sale, conversions, payments, earnings, and donations of cryptocurrency are taxable.

Different countries and regions of the world have different rules and regulations regarding cryptocurrency tax policies. In the United States, however, all cryptocurrency-based transactions are taxed.

Crypto income: is it business income or a capital gain?

It depends.

If you get paid in cryptocurrency for services or products, it’s like regular income. If your business receives payments in cryptocurrency, then that is business income. In this case, that income will be associated with the rest of your income channels when filing returns.

The IRS considers all cryptocurrency income and payments to be regular income and payments. As such, there is no difference between the two when it comes to tax reporting.

Note that the price of cryptocurrencies tends to be volatile. As such, you can only pay taxes on the equivalent USD value of the cryptocurrencies at the time of receiving payment or income. If its value goes up or down in the future and is significantly different from the date you received the money when you file the return, it doesn’t change anything. The equivalent amount in USD at the time of receipt of the cryptocurrencies will be considered the taxable amount by the IRS.

If you buy cryptocurrencies from crypto exchanges and hold them specifically to earn gains, that falls under the category of capital gains.

If you have received cryptocurrencies as income and have subsequently chosen to hold them (preferably in a non-private wallet with no exchange) rather than liquidating them or converting them to USD / fiat, this will still be considered a ordinary income, given the possibility that you may realize a capital gain on the amount simply by holding it.

Which cryptocurrency transactions are taxable?

All. The IRS taxes all cryptocurrency transactions.

Cryptocurrencies are not considered to be currencies or even a form of transaction legally in the United States (and most of the world). As such, they are taxable regardless of what medium you use them on.

For example, these cryptocurrency transactions are taxable (non-exhaustive list, but it should give you a pretty good idea of ​​how they are perceived from a tax point of view):

  1. Buying cryptocurrencies from exchanges for short term gains.
  2. Buying cryptocurrencies from exchanges for long term gains.
  3. Sell ​​cryptocurrencies on exchanges to earn profit (or on a loss).
  4. Sell ​​cryptocurrencies that you have mined.
  5. Acquisition of cryptocurrencies through staking, freezing, or other blockchain consensus methods.
  6. Acquisition of crypto-currencies via airdrops or blockchain hard forks.

These are all taxable cryptocurrency transactions.

Do you still have to pay taxes if your Bitcoin is stolen?

No. Your Bitcoin (or any other cryptocurrency such as Ethereum or Dogecoin) can only be stolen if your private key or seed phrase has been given by you to someone else (which should never be done) given that it is also impossible to decipher a cryptocurrency wallet. as impractical.

If your Bitcoin has been stolen, you simply don’t have that asset anymore. It is as if you bought an asset for capital gain but turned out to be a scam. Now that you no longer own that asset, you no longer have to pay taxes on it.

Note that you only pay taxes on fixed assets you own when filing your income tax returns. If you stop owning this asset, you are no longer required to pay tax on it. Not to mention that it will be futile to try to collect data on the profits of the stolen asset, because none of the profits will actually be your profit, but the thief’s profit.

Tax tools for crypto

With the increase in cryptocurrency investment, trade and transactions, many software and tools for cryptocurrency management and taxation have emerged in the market. However, not all are good.

Here is a list of some reliable and trustworthy tools you can use to better manage your cryptocurrency taxes.

  1. CryptoTrader.tax: It is a platform that is both easy to use and robust in its capabilities. You can choose to use the CryptoTrader.tax service if you prefer a sleek and hassle-free way to generate tax reports. They also have a pretty decent support system for any questions or confusion. You can generate detailed tax reports using their system on all your cryptocurrency income and profit.
  2. Koinly: Koinly is great software. It combines two very important characteristics: accounting and taxation. In addition to the United States, Koinly also manages the calculation and reporting of taxes for 20 countries, including Canada and Australia. Reports generated with Koinly can be submitted directly to the IRS. More specifically, you will be able to download a completed Form 8949 as well as the attachment of Annex D in PDF format. It can be connected to multiple blockchains, exchanges and wallets to automatically receive and synchronize data related to your cryptocurrency transactions.

How to minimize crypto taxes

Taxes are levied on any cryptocurrency you hold as assets or any cryptocurrency received as income. There is no way to cut corners here. The loss of capital based on the cryptocurrency can be adjusted relative to the profit based on the cryptocurrency.

Long-term (over a year) cryptocurrency holding gains have a lower tax rate than short-term gains.

photo by Karolina Grabowska of Pexels

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