CRUNCHING THE NUMBERS ON YOUR CRYPTO ASSETS
Huge profits have been made over the years in cryptocurrency investing. And with the trend likely to continue, how are you positioned in dealing with crypto taxes? Let our tax advisors at Credo guide you in effectively managing your cryptocurrency portfolio from a taxes point of view!
MADE A FORTUNE LAST YEAR IN CRYPTO? UNDERSTAND ITS TAX IMPLICATIONS!
2021 was a record-breaking year for cryptocurrency. We have witnessed its rise and fall and how cryptocurrencies and other forms of crypto assets evolved over the past years. If you’re one of the more than 10% of Americans who has traded crypto in 2021, you might be wondering how your trading would impact your taxes. If you’ve started with the revolution a few years ago or you’ve just started with it last year, it is a fact that the astonishing rise in the value of some cryptocurrencies would have a huge impact in your tax bill.
The IRS is on top of all efforts to enforce crypto tax compliance to make sure that crypto traders won’t violate the law. Every transaction you have using cryptocurrency should be reported to the IRS and to the state tax authorities (where applicable) as each has different tax implications (i.e. crypto sales, conversions, payments, and income).
YOUR GUIDE IN CRYPTOCURRENCY TAXES
We provide here a guide which will explain everything you need to know about taxes on crypto trading and income. Get ready to learn how to file crypto taxes, crypto tax rates, and other important details about this multifaceted subject.
WHAT IS CRYPTOCURRENCY?
Based on the IRS’ definition, cryptocurrency is a type of virtual currency that makes use of cryptography to authenticate and secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. Any virtual currency that has a corresponding value in real currency or that acts as an alternative for real currency is termed as a “convertible” virtual currency. Bitcoin is an example of a convertible virtual currency that be digitally traded between users and be used for purchasing or exchanging into real currencies (such as US dollars, Euros, etc.) or other virtual currencies.
HOW IS CRYPTOCURRENCY TAXED?
While the number of merchants who are accepting Bitcoin is growing, this virtual currency is still not yet considered as cash by the IRS. The same is true for other cryptocurrency and stablecoin that are available on exchanges. Based on the current guidelines of the IRS, a virtual currency is classified as a property for federal tax purposes. So any tax principles that are applicable to property transactions would also be applied to cryptocurrencies.
Check here for the complete IRS guidelines on virtual currency.
CURRENT CRYPTOCURRENCY TAX RATE
Cryptocurrency transactions are subject to taxes arising from capital gains and losses incurred since they are categorized as property transactions. Selling a cryptocurrency for more than its purchase value (just like selling a stock or a physical property) would result in a “capital gain”. Your tax burden will be calculated by the IRS based on how long each particular crypto investment has been held.
Short Term Capital Gains
Cryptocurrency gains held for less than a year are considered as “short term” capital gains, classified into the regular taxable income, and computed according on the individual’s income tax bracket.
Long Term Capital Gains
Cryptocurrency gains held for more than a year are considered as “long term” and are subject to different tax rates as compared to the short term capital gains. However, these rates are usually lower than the rates on short term assets.
TAXABLE EVENTS IN CRYPTOCURRENCY
Note: Depending on the facts and circumstances of each scenario, the resulting gain or loss may be classified as either capital or ordinary income.
Examples:
- You would incur capital gains/losses when a cryptocurrency investor trades cryptocurrency.
- A cryptocurrency miner would report an ordinary income that is equal to the fair market value of the coins mined.
Selling cryptocurrency for fiat currency (i.e.,USD, CAD, EUR, JPY, etc.)
Trading cryptocurrency for another cryptocurrency (e.g., BTC for ETH, does not require cashing out to USD to be taxable)
Using cryptocurrency to buy a good or service
Earning cryptocurrency as wages, mining income, staking income, or interest income
Receiving cryptocurrency as a result of a hard fork or an airdrop
DETERMINING HOW MUCH YOU OWE IN
CRYPTOCURRENCY TAXES
We’ve outlined here some factors that would help you in determining how much you owe in taxes for 2021.
Take note though that:
- It’s important that you seek advice from a qualified tax advisor for a direct and unique advice according to your own financial status.
- There are varied ways in acquiring or exchanging virtual assets like cryptocurrency. Thus, it’s imperative to conduct research and identify the guidelines that are applicable to your specific situation.
When will you be taxed if you purchase and hold crypto?
You will not be taxed on the transaction of buying cryptocurrency with a currency like US dollar if you don’t sell it on the same year. This is true even in there was an appreciation in the value of the cryptocurrency. However, once the cryptocurrency was sold or exchanged, you may then be subject to the capital gains tax.
Will you be taxed for crypto-to-crypto transactions?
Trading all or even a portion of a crypto holding for another crypto is a taxable event. Called as “swaps” by the IRS, a crypto-to-crypto transaction is subject to taxation on gains of the originally-held asset. Gain or loss is the variation between the fair market value of the property that was received and the adjusted basis in the virtual currency exchanged (as defined by the IRS). Fair market value is the price that a property would be sold for in an open market.
How are crypto miners treated?
While crypto mining s considered a taxable event, any crypto acquired via mining is treated differently based on whether the crypto was mined professionally or as a hobby. Generally, crypto hobbyists should report their mined crypto on Form 1040 Schedule 1 as “Other Income”. Crypto professionals on the other hand, need to report their earnings on Schedule C.
Is a crypto gift or inheritance taxable?
A crypto received as a gift would not be taxable (on the value of the holding) until it is being sold or exchanged. When selling or exchanging a crypto, the holding period of the property must be accounted for and that includes the time that it was held by the person who gifted the crypto to you. When inheriting a crypto, take note that it would be valued on the date that of death of the testator. But it would be subject to tax on any capital gains acquire from that date forward.
Forks, Airdrops, Splits
In an instance that you decided to hold a cryptocurrency that has gone through a hard fork and as a result, you acquired more of that token through an airdrop result, you are required to report the fair value of an additional crypto as a taxable income in the year of receiving it. When you receive an additional coin as a result of a cryptocurrency that has gone through a chain-split, you will realize the taxable income upon claiming the coins. The income is equivalent to the price of the chain-split coins at the time of the claim.
Receiving Crypto as an Income
Wages in the form of a crypto are considered as ordinary taxable income. You have to keep a record of the fair market value of the cryptocurrency on the date of each payment to determine the taxable income.
Using Crypto in Making Purchases
Using crypto in making purchases has been a growing trend nowadays. Paying for goods and services using cryptocurrency is subject to capital gains taxes. The gain or loss is computed based on the difference the fair market value of the service received and the adjusted basis in the virtual currency that was used to make the payment.
Crypto Tax Calculators
Cryptocurrency tax calculators is a helpful tool when determining the net gains and losses in cryptocurrency transactions. But it is still highly-advisable that you consult a professional in the field like Credo’s tax advisors to get an accurate information of your crypto tax.
PROCESS IN REPORTING CRYPTOCURRENCY HOLDINGS ON
TAX RETURNS
- Step 1: Track of Your Crypto Transactions
- Step 2: File Your Crypto Tax On Time with the Help of Credo Team
Tracking all crypto transactions in a spreadsheet is very important to reduce the stress of tax season. The following information must be included:
- Transaction Date
- Transaction Summary
- Fair Market Value of the Token on the Specific Date
The 2021 US Tax Returns forms must be completed by April 15, 2022. File your crypto tax on time with the help of Credo Team!
Taxes are confusing in general. And so it’s a must that you hire a qualified professional tax advisor like Credo Team. Our team stays up to date on the latest IRS rules and regulations. Hiring us is a wise decision most especially if you have made a high number of crypto trades or if you have incurred substantial capital gains for 2021.
Huge profits have been made over the years in cryptocurrency investing. And with the trend likely to continue, how are you positioned in dealing with crypto taxes? Let our tax advisors at Credo guide you in effectively managing your cryptocurrency portfolio from a taxes point of view!
TAX PLANNING STRATEGIES TO MINIMIZE CRYPTO TAX BURDEN IN 2022
Long Term Investment
Majority of cryptocurrency investors enter the market with the hopes of making huge profits in the least possible time. But in fact, holding crypto assets for the long term has more benefits when you aim to pay reduced tax rate on any capital gain.
Selling Crypto Assets in a Low-Income Year
When dealing with taxes on both short-term and long-term gains, one of the best ways is to sell your crypto assets in a low-income year because short-term gains would not have other income added on. Take note that short-term gains are taxed as ordinary income. So that pushes you into a higher tax bracket. On the other hand, for long-term gains, a lower overall income for a specific year would mean a lower tax rate on those gains as well.
Crypto-Backed Retirement Portfolio
Those who perceive cryptocurrency as a more savvy long-term investment as compared to stocks ride the growing trend of investing crypto through a retirement plan. Comparable to traditional IRAs, cryptocurrency portfolios make it possible for account holders to trade without setting off taxable events.
Using Capital Losses to Offset Capital Gains
Offsetting capital gains with capital loses is another strategy that is efficiently used in minimizing crypto taxes. To do this, the losses on crypto assets which are sold during the year must be subtracted from taxable gains on cryptocurrencies that have appreciated in value.
Minimizing Taxable Income
One of the ways to minimize crypto tax is to find a way on how to reduce the taxable income. A reduction on the taxable income results to a reduction in the amount of tax to be deducted.
Bestowing Crypto Assets as Part of Your Estate
The value of your cryptocurrency investment will increase in value at the time of your death (as compared to its fair market value). Bestowing crypto assets to your heirs means they would not need to pay taxes based on your original basis on the sale of cryptocurrencies that they inherited.
Gifting Crypto Assets
Gifting crypto assets is one step to reduce your crypto tax. This is because the person who receive the assets may earn an income low enough for him to pay taxes on the appreciated property when it’s sold or he would just need to pay lesser taxes than what you paid for had you sold the assets yourself.
Donating Crypto Assets to Charity
Donating some of your appreciated cryptocurrencies to charity give you two benefits. Basically, donating some of your crypto assets to charity would help in offsetting the capital gains that were incurred during the year.
- Donations won’t be subject to capital gains tax.
- You will be entitled to a significant tax deduction on your tax return.
Consider Moving to a Place with Tax Benefits
If you are willing to do so, moving to a place with tax benefits like Puerto Rico (which offers unique tax benefits) would help in minimizing crypto taxes. Make sure to consult a qualified tax advisor like Credo Team if you are considering this option.