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).
In this blog article, we provide here a guide that explains 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.
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.
WHAT ARE THE CURRENT CRYPTOCURRENCY TAX RATES?
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.
WHAT ARE THE TAXABLE EVENTS IN CRYPTOCURRENCY?
- 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
Note: Depending on the facts and circumstances of each scenario, the resulting gain or loss may be classified as either capital or ordinary income.
- You would incur capital gains/losses when a cryptocurrency investor trades cryptocurrency.
- A cryptocurrency minder would report an ordinary income that is equal to the fair market value of the coins mined.
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 is 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.
What is cryptocurrency mining? It is the process where specialized computers (nodes or mining rigs) validate blockchain transactions for a specific cryptocoin which in turn receive a mining reward for their computational effort.
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.
What happens in the case of forks, airdrops, and 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.
How is income in the form of crypto taxable?
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.
How is using crypto in making purchases taxed?
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.
Are crypto calculators advisable to use?
Cryptocurrency tax calculators are 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 accurate information of your crypto tax.
PROCESS IN REPORTING CRYPTOCURRENCY HOLDINGS ON TAX RETURNS
Step 1: Track of Your Crypto Transactions
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
Step 2: File Your Crypto Tax On Time with the Help of Credo Team
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!
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