If you are an investor in crypto, maybe one of the things you are not excited about is the taxes, and you are probably wondering about the impact of your trading and other crypto activities on your taxes. There are different taxable events in this space, e.g. trading one crypto for another. Also, it is important to report your crypto taxes to IRS. Please keep reading this guide to find out more about cryptocurrency taxes.
How Is Crypto Taxed?
In the US and other markets, stocks, bonds and other property attract taxation. Similarly, the IRS considers crypto as a digital asset, which means three is the taxation of the transactions. At this point, it will be taxed as capital gains. Examples are when you sell crypto for cash, convert it to another crypto, or spend it on buying goods and services.
Moreover, whenever a taxpayer receives ordinary income, it gets taxed at its fair market value. This is the case with crypto. Therefore, there must be crypto income. However, how do you tell you to have crypto income?
Do you provide a service or sell a good to someone and get the payment in crypto? Does your employer pay you in crypto? Do you mine or stake crypto and receive the rewards? Do you lend someone crypto and have them pay back with interest? Have you received an airdrip from a crypto company? Do you receive crypto rewards and incentives? If the answer to these questions is yes, you have crypto income, and you need to pay the tax.
To be a good crypto investor, you should record your losses and gains since the amount you gain determines the amount of tax you should pay. Remember, your crypto will be taxed as income or capital gains depending on how you received it and how long you have held it.
If you have been holding it for less than a year, you will pay short-term capital gains tax, and the rates will be your ordinary income rates. On the other hand, if you have held crypto for more than one year, you will pay long-term capital gains tax, and the rates range from anywhere between 0 and 20%.
Moreover, the gains are not the only things attracting taxes. What happens when you receive losses? Maybe the selling price of your crypto is lower than the price you paid for it. There is the provision of capital on your tax in such instances, which you can claim.
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How Do You Report to IRS?
At this point, you now know that whenever you realize gains after selling, trading or disposing of crypto, you need to report to IRS. Also, you should report the losses on crypto too. Remember, each crypto transaction, from the conversions, payments, and sales to the income; all attract different tax implications.
However, how do you report to IRS? You have to fill out a form for any taxable cryptocurrency event you carried out during the year. It is Form 8949, which requires you to list each cryptocurrency transaction you carried out throughout the year. It also includes the following details;
- Name of crypto
- Date acquired
- The date you did the selling, trading, or any way of disposing of it
- The proceeds
- Cost basis
- Gains or losses
After completing this form, you should have it as an attachment to your federal income return.
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What Happens If You Don’t Pay Crypto Taxes?
You must report your crypto to IRS or any other governmental agency depending on your location. If you do not pay crypto taxes, the IRS can impose interest and penalties on you. Moreover, there are chances of having a crackdown on anyone avoiding payment of crypto taxes. You don’t have to be a victim.
Therefore, if previously, you have been successfully dodging reporting your crypto taxes, act differently since there is no guarantee of doing the same again. As a taxpayer, you should do what is expected to avoid the consequences.
Additionally, it would help if you avoided a last-minute rush; planning is key and filling your crypto-related tax reports early is a savior. If you have always been the April 1st taxpayer, this is an unhealthy approach to the tax season, and keeping up with a year’s worth of crypto events can be tedious.
Therefore, you can ensure you have monthly records by updating monthly crypto taxes and keeping proper and accurate track of the records and events. Importantly, whenever you are unsure, ensure you consult a cryptocurrency tax professional or expert with experience and who is familiar with IRS guidance. They can help you know your specific tax obligation, help you report correctly, and provide answers to your pressing questions in matters crypto.
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How Do I Avoid Paying Taxes on Crypto?
If you are a newbie in the cryptocurrency space and would like to know how you can avoid paying the taxes on your investments, the trick is; Don’t sell. This is because you trigger a taxable event whenever you cash in your crypto. Therefore, when you avoid selling your investment or exchanging it with another, there will be no taxable transaction; hence, you will evade tax payment.
However, keep in mind that the consequences of evading crypto tax and fraud are severe and that avoiding the taxes entirely can be tricky. So, what if you want to reduce the tax? The following strategies can help;
- Harvest the losses for your crypto holdings that have reduced in value.
- Make long-term investments.
- Give out crypto gifts.
- Donate your crypto to charity
- Sell in a low-income year
- Take a crypto loan
- Buy and sell crypto via your IRA
- Reduce your taxable income
When investing in crypto, you should be prepared to pay the taxes on the capital gains and income. This is because the IRS considers it a digital asset, meaning that it attracts tax on its transactions. Importantly, reporting to IRS and paying the taxes is important, and you should not evade the process to avoid penalties or any severe consequences. Also, early management of your taxes and record-keeping can help you avoid the last-minute rush.
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