If you’re looking for a helpful guide to crypto taxes, you’re in the right place. It’s completely understandable that you weren’t aware of crypto taxation regulations. It is pretty new for us, as well as the financial regulators.
For example, the American IRS has brandished a question on the top of their Income Tax form in clear words, asking “At any point of time in 2020, did you send, receive, exchange or otherwise acquire any financial interest in any virtual currency?”
The wording is purposefully vague to cast a wide enough net to include any and all types of virtual currencies – present and future – into the tax bracket.
So, you are supposed to pay taxes on your crypto trades. Yes, mining, airdrops, and forks too.
Now that we’ve understood this very clearly, let’s unpack this further.
One does not pay any tax while buying any virtual currency. Taxation only comes in once you’ve sold it. Since the IRS considers virtual currencies as property, it treats it like any other property you hold and taxes you based on the capital gains made.
You will pay taxes on the capital gains made on the transaction.
Capital gain = selling price – buying price – fees
Depending on how long you’ve held the coin, under or over a year, your gains will be taxed either with the short, or the long term rate.
Cryptocurrency taxation is a combination of capital gains and income tax.
The IRS taxes you on the capital gains made –
The IRS will tax you as income tax when –
The following are tax free –
Crypto transactions classified as income tax will be taxed as per the income tax slab of that particular year.
As a high frequency or even a hobbyist trader, most of your transactions would be classified under capital gains.
If you sell after holding it for under one year, its the same rate as your income tax.
If you sell after holding it for over one year, you would pay the long term tax rate, which is actually lower than the income tax rate.
The long term rates for 2020 are:
RateFor Unmarried Individuals, Taxable Income OverFor Married Individuals Filing Joint Returns, Taxable Income OverFor Heads of Households, Taxable Income Over0%$0$0$015%$40,000$80,000$53,60020%$441,450$496,600$469,050
Unlike stocks and bonds where you may be sent a 1099 by your brokerage firm, when it comes to Bitcoin and other cryptocurrencies, for all intents and purposes the onus of tax reportage lies completely with you. AND FOR THIS PURPOSE, BEAR.TAX CAME INTO EXISTENCE.
Form 8949 – Used for capital gains/losses. Fill in all your long term and short term holdings.
Schedule D – Used for capital gains/losses. It’s a summary of your Form 8949
Schedule 1 – Form 1040 – Used for income from cryptocurrencies – Answer “Yes” for the question on top of the form. Fill in additional crypto income on line 8 of this form.
Or just use bear.tax! We’ll help you out.
Make sure you’ve held the crypto asset for more than 12 months before you donate it to a charity, to avail a tax deduction equal to the market value of the asset at the time of donation. Furthermore you would not pay any tax on the capital gains of the donated “property”
Since the IRS considers crypto assets as property, they are not yet subject to wash sale rules. Sell your loss positions so you could harvest losses for tax purposes and swiftly turnaround to the same position without having to wait for 30 days. Offset your crypto and other capital gains with this. It is also important to note that if the coin gains price heavily in future, this lower price that you bought it back then for, will be the cost basis. This is a risk involved or a trade off to save taxes now vs in the future.
If you’ve got a large amount of unrealised crypto gains, move those profits into a Qualified Opportunity Fund.
5 years – 10% initial crypto tax gain will be tax free.
7 years – Additional 5% becomes tax free.
10 years – You can completely avoid capital gains tax.
Although you cannot save taxes directly you could defer them until retirement. The advantage you gain here is by compounding crypto gains back into your portfolio without having to pay tax on them right now. Use this to increase your overall return exponentially in the long run. Additionally, when you take out funds at your retirement, you would benefit from a lower tax rate as well.
There is one silver lining with the IRS coming in and regulating cryptocurrencies. It has legitimized virtual currencies giving them an authoritative backing, encouraging large institutional investors.
This is great for everyone involved. The only way to go is up, and being on top of your taxes saves you money now, and bureaucratic complications later.