Are you a little bit confused about how you are meant to file your crypto taxes? You are not alone. As cryptocurrency is still a relatively non-legalized venture, it is not always easy to find tax professionals with expertise in the field.
To help investors like you, we’ve simplified the entire cryptocurrency tax return process.
When you finish reading, you will understand how to report all your cryptocurrency transactions on your income tax return.
Unsurprisingly, the success of cryptocurrency has come with tax authorities eager to collect their share of the revenue from activities such as cryptocurrency trading, mining, and interest earned through decentralized finance (DeFi) platforms.
However, it seems like not so long ago cryptocurrency was a niche field involving only the most tech-savvy people. At the time, the exact rules for reporting and paying taxes on cryptocurrencies were unclear.
Many of those using the various currencies haven’t even bothered to come forward because cryptocurrencies were still believed to be under the radar of most tax authorities.
However, authorities are catching up and it is time to acknowledge that they are now working hard to establish rules for crypto taxes.
If you are new to cryptocurrency trading or have been doing so for a while, you must report your income and pay applicable taxes according to local regulations.
That being said, it can be difficult and confusing. It can be even worse when things are put off until the last minute.
If you participate in the market in any way, you should keep records and try to understand cryptocurrency tax law and the tax implications of each transaction.
In this article we will answer some questions, how do you file taxes for cryptocurrency? How do you declare cryptocurrency with my taxes? How can you withdraw cryptocurrencies without paying US taxes?
Why you need to file taxes on cryptocurrencies
The first reason you need to file taxes on cryptocurrencies is that it is the law and it is always best to stay on the good side of the tax authorities.
In the early days, cryptocurrency was viewed by many as a financial gray area, with regulators denouncing them for being used for illegal transactions and for hiding earnings or laundering money.
As with any other form of payment, this still occurs in the cryptocurrency world. However, governments have now started implementing tools that take advantage of one of the key features of blockchain technology – transparency.
While the reports produced by the exchanges do not meet the very high standards of more conventional investments such as stocks, compliance is increasing with each passing year.
More than ever, authorities are focusing on cryptocurrencies and are demanding more reporting from exchanges.
The United States Internal Revenue Service (IRS) is also targeting a budget increase that would strengthen cryptocurrency tax enforcement.
Even if you haven’t received any tax documents related to cryptocurrency trading, that doesn’t mean you don’t have a taxable event.
You must report all of your activity whether you believe the exchange has reported it or not. If you don’t do this, you may be subject to an audit.
Can you legally avoid crypto taxes?
Taxes on cryptocurrency transactions should not be avoided. You must understand that if you buy cryptocurrencies with fiat money in the UK, you will not be taxed.
However, you should keep an eye on your crypto transactions to keep an eye on your cost basis in detail. This ensures that you can accurately calculate your cryptocurrency gains and losses in the future.
If you buy and sell cryptocurrencies on a regular basis or as part of a cryptocurrency trading company, your business profits, after deducting losses, are subject to income tax and no capital gains tax.
If you still want to know how to avoid paying taxes on cryptocurrency gains? Give cryptocurrencies to your relatives as a charity or gift.
Reporting your deductions allows you to deduct donations to a qualifying charity. Before giving away a fortune, however, you must have had it for at least a year.
Giving away cryptocurrencies can also help you avoid taxes on your earnings. There is also no gift tax for the beneficiary.
Crypto earnings are treated as capital gains income
If you’ve ever made a profit and paid taxes on traditional investments like stocks or bonds, some of the tax issues associated with cryptocurrency will sound familiar, and that’s because the IRS treats cryptocurrency as property.
So how do you report crypto transactions to the IRS? When you make money from cryptocurrencies, you pay capital gains taxes in a similar way to paying income taxes on stocks or bonds.
Take the selling price of the asset and subtract the cost basis: the difference represents the amount of profit you made trading a specific cryptocurrency.
From there, your cryptocurrency tax liability depends on whether you’ve held the currency for less than a year or for more than a year.
If the retention period was less than one year, you will pay a short-term capital gains tax, which in the United States can range from 10% to 37%, depending on your tax bracket.
For more than one year you are subject to the most favorable long-term capital gains tax. The long-term rate can be 0%, 15%, or 20% depending on the tax bracket.
Crypto taxes cover more than just your investments
Do you think you’re off the hook because you haven’t traded cryptocurrencies as an investment? think again All types of use of cryptocurrencies are subject to taxation.
Even if you’re just a consumer and use your coins to shop, you should still state this on your tax return. Even exchanging one cryptocurrency for another is something that needs to be reported.
Suppose you buy a cryptocurrency and use it for simple purchases. This may not seem like a form of income, but to the IRS it is.
If you bought those coins and the price went up so you get more of that money, technically that’s a capital gain. It must be reported and you must pay tax on it.
Those who are paid for their work in cryptocurrencies must also report income to the tax authorities.
One way to make income reporting easier is to receive payments in cryptocurrency and then exchange the cryptocurrency for dollars.
You can then enter your personal income in dollars. Choosing to keep the coins and allowing them to appreciate or lose value can complicate matters for tax reporting purposes.
If you make money mining cryptocurrencies, this is another problem. Rather than capital gains or personal income, this would likely be business income.
Apart from that, there are various issues that can come up with the crypto mining earnings report, but more on that later.
Can the IRS Track Cryptocurrencies?
One sign that the IRS is beginning to track cryptocurrency income is that it specifically asks taxpayers on Form 1040 if they have engaged in cryptocurrency activity.
The form asks if you have received, sold, sent, exchanged, or purchased an interest in virtual currency. This may seem like a small thing, but it has a big impact.
Most importantly, the IRS is looking for a truthful answer about these forms of income. Lying can have serious consequences beyond simple tax compliance issues.
The information you provide on your tax returns is subject to the possibility of perjury. If you lie when answering this question, you may be subject to fines or other penalties.
However, the IRS guidance states that you don’t need to tick “yes” if the only type of transaction you made was to buy cryptocurrency with dollars.
Furthermore, you must keep records of these transactions to record your cost basis when conducting other types of transactions using the cryptocurrency you have purchased.
Cryptocurrency mining has unique tax issues
The income from cryptocurrency mining is different from the income that can be earned from investing. Instead of a capital gain, mining income is treated more like business income – meaning you are taxed on the profits.
If you run a crypto mining business, the fair market value of each coin mined would be considered revenue.
As a business, you can also deduct certain expenses that generate income. For example, you can write off the cost of mining equipment.
However, just because you’re mining doesn’t make the activity a business. Joining a mining pool to make some money may not count as a business.
Instead, this can be considered hobby income. In this case, the tax implications are different. An important difference is that you can’t deduct hobby expenses from hobby income to reduce your tax liability.
Can you write off crypto losses?
No one wants to lose money trading, but it could be a way to reduce taxes on cryptocurrencies. Similar to stocks and other more conventional investment vehicles, you can deduct capital losses.
If you have capital losses, you may be able to offset some of the capital gains by reporting them on your tax return.
This is a case where cryptocurrency tax laws can be beneficial. As a cryptocurrency investor, you can claim capital losses of up to $3,000 per year.
If your losses exceed $3,000 in any given year, you can deduct the remainder from future tax returns to account for any gains you may have made.
Additionally, donating to cryptocurrency charities can also help reduce taxable income — and support a cause you love. However, there are limits to how much can be deducted from your income.
Do you have to pay crypto taxes if you don’t withdraw?
It may seem like everything has a cryptocurrency tax, but there are some exceptions. While you must pay taxes on personal income, capital gains, and business income in cryptocurrency, there is a shortlist of transactions that are not taxable.
As previously mentioned, buying cryptocurrencies is not a separate taxable transaction. Even if the value increases, you can buy and hold cryptocurrencies without paying taxes.
Since there is no immediate gain or loss from owning cryptocurrency, it is not taxed. However, this has tax implications.
It’s only when you sell the asset and receive cash or shares of another cryptocurrency that you have to pay tax: you’ve ‘realized’ the gains and you have a taxable event at that point.
Finally, if you sell, trade, or use the cryptocurrencies you have purchased, you must report the purchase.
Moving your coins from one exchange to another or between wallets is not taxable. They already own the coins and don’t sell them for a profit, just move them to a new exchange.
This means you don’t need to report the simple movement of coins between exchanges or wallets.
If you receive a cryptocurrency gift, no tax is due on it. However, if the gift exceeds $15,000, you will have to pay taxes on it. If you decide to sell a cryptocurrency gift worth more than $15,000, you would use the same cost basis as the person who originally bought the coins.
A cryptocurrency donation is another situation where the transaction is not taxable. If you donate cryptocurrency, you must record the transaction at the fair market value of the coins at the time of the donation.
How do I file crypto taxes?
Now that some of the issues related to cryptocurrency tax laws are out of the way, let’s look at the process of paying taxes on cryptocurrencies.
Crypto taxes might be simple for some people but can be confusing and complex depending on the type of transactions.
In general, the more active you are, the more complicated crypto taxes become. In addition, seemingly simple actions can have significant tax implications. Just buying a cup of coffee with Bitcoin (BTC) can have tax implications.
If you run a business that deals with cryptocurrencies, it can be beneficial to pay for the services of a tax expert who can help you solve the most complex issues and keep you compliant.
Whether you hire a professional or not, you should keep detailed records of every trade and transaction.