Stay on Top of Your Cryptocurrency Taxes

Some consider cryptocurrency as a form of currency, some consider it a trading vehicle and some see it as a financial revolution. But even though you can buy or sell cryptocurrency on an exchange, it is still unregulated, and it does not qualify as a security. This may lead some taxpayers to think that cryptocurrency can’t be taxed. Unfortunately for them, this is incorrect. But how exactly should you pay taxes on your cryptocurrency? Read on to learn more.

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Crypto Gains Are Taxable

In terms of cryptocurrency taxation, the IRS views crypto as a capital asset. This puts it in the same category as stocks, bonds, mutual funds, exchange-traded funds or any other such asset.

Capital gains tax comes in two forms: long-term and short-term. Long-term capital gains tax rates are special rates that give a break to taxpayers who hold their capital assets for longer than one year. They range from 0% to 20%, depending on your income.

Short-term capital gains rates, on the other hand, apply to trades on assets held for one year or less. These gains are taxed at ordinary income rates, which for tax year 2022 range from 10% to 37%.

Thus, the income tax rate on your cryptocurrency trades depends on two things: your holding period and your income.

Using Your Crypto for Purchases May Be Taxable

It makes sense that crypto used for purchases is taxable as income to the seller. But what may take more mental gymnastics to understand is that if you are the one using crypto to make a purchase, that transaction may be taxable to you as well.

As the IRS views it, when you use your crypto to make a purchase, you are essentially exchanging your crypto for dollars to acquire your goods or services. This conversion can be a taxable event if the value of the goods or services you’re buying is higher than the original cost of your cryptocurrency.

Imagine this scenario: You buy $1,000 of a cryptocurrency when it trades at $10, giving you 100 coins or tokens. Six months later, when that crypto is trading at $20, you use your 100 coins to buy a $2,000 computer. Since you paid $1,000 for your crypto and are now receiving $2,000 in value for it, according to the IRS, you have a $1,000 taxable gain. Whether or not that gain is taxed at ordinary income rates or capital gains rates depends on whether or not you have held that crypto for more than one year or not.

You Can Deduct Your Crypto Losses

The silver lining to the taxation of your cryptocurrency is that you’re also able to deduct any losses you may have. Using the example above, if you instead used that crypto you paid $1,000 for and sold or exchanged it for only $500, then you’d be able to claim a capital loss of $500. As with other capital assets, you can use that loss to offset any taxable gains you may have, and if you have excess losses, you can offset up to $3,000 of ordinary income as well. Additional losses can be carried over to future years.

Do You Have To Report Crypto Under $600?

Generally speaking, 1099s are not issued to taxpayers for amounts under $600. This includes cryptocurrency exchanges or clients you may have who paid you in crypto. However, this doesn’t mean that the income is not reportable.

Although the IRS may only be informed if you have generated income in excess of $600, whether or not it is directly notified, taxable income is taxable income, and you are legally required to report it.

Note that in some instances, you may not receive a 1099 for your crypto income unless you exceed 200 transactions and earn more than $20,000. This reporting requirement was supposed to drop to just $600 for tax year 2022, but at the last minute, the IRS delayed this change until tax year 2023. However, whatever the legal requirement is, some crypto exchanges — or perhaps some of your clients — may still issue 1099s to both you and the IRS reporting your transactions, even if they fall below the legal limit.

Paperwork You Need To File for Your Cryptocurrency Taxes

When you file your taxes, the first thing you’ll have to do is check the box asking if you participated in any crypto activities during the prior year. According to the IRS, the tax form for the 2022 tax year asks, “At any time during 2022, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”

Next, you’ll have to report any income and/or capital gains related to your crypto activity. Income from mining, for example, will have to be reported on Schedule C, as it will generally be considered to be self-employment income.

The same is true if you run a business and accept crypto in exchange for goods or services. Transactions from buying or selling crypto will appear on Schedule D, just as it would for any stock transactions you may have. You may also have to use Form 8949.

The Bottom Line

Taxation of any capital asset can be complicated, but this is particularly true in terms of cryptocurrency. As even seemingly innocuous activities like using crypto to buy a cup of coffee can result in a taxable transaction, it’s usually a good idea to enlist the aid of a tax professional if you have any involvement with cryptocurrency.

FAQ

Here are the answers to some of the most frequently asked questions about cryptocurrency taxes.

• Do you pay taxes on crypto?

  • Yes, you will have to report any income and/or capital gains related to your crypto activity.

• How do you avoid crypto taxes?

  • There is no way to avoid taxes on your crypto-related income. If you do not have any income on your crypto you can, however, deduct your losses.

• How is crypto taxed in the U.S.?

  • Crypto is taxed based on how long you have held it and your income.

    • -Long-term capital gains tax rates range from 0% to 20% and are applied for assets held longer than one year.

    • -Short-term capital gains tax rates are 10% to 37% and are applied on assets held for one year or less.

Information is accurate as of March 21, 2023. 

This article originally appeared on GOBankingRates.com: Stay on Top of Your Cryptocurrency Taxes