2021 was a big year for cryptocurrency, with everything from laser eyes to record highs. If you’re one of the more than 10% of Americans who traded cryptocurrencies in the last year, you undoubtedly have questions about how your transactions and other cryptocurrency activities will affect your taxes.
Each of these transactions has various tax ramifications, and U.S. taxpayers are expected to record cryptocurrency sales, conversions, payments, and income to the IRS and state tax authorities as appropriate. Learn when your cryptocurrency is taxed in this article, as well as how your actions may affect your taxes. Let’s start now.
Should I pay crypto taxes?
Cryptocurrency is regarded as a digital asset in the US, and the IRS views it similarly to stocks, bonds, and other financial assets. Similar to these assets, depending on how you acquired your cryptocurrency and how long you kept onto it, the money you make from it is taxed at various rates, either as capital gains or as income.
It’s crucial to consider your cryptocurrency usage in 2021 in order to determine if you owe taxes or not. Taxable events are transactions that generate taxes. Non-taxable events are those that don’t. Let’s dissect them:
Purchasing bitcoin with cash and retaining it: Cryptocurrency purchases and ownership alone are not taxed. When you sell something, and the earnings are “realized,” the tax is frequently paid later.
Giving cryptocurrency to a recognized non-profit or charity that is tax-exempt: You can be eligible for a charitable deduction if you donate cryptocurrency directly to a 501(c)(3) nonprofit like GiveCrypto.org.
Getting a present If you’re fortunate enough to get cryptocurrency as a gift, you probably won’t pay taxes on it until you sell it or engage in another taxable activity, such as staking.
Giving a gift: How considerate! Without paying taxes, you can give up to $15,000 to each recipient each year (and higher amounts to spouses). You must submit a gift tax return if your donation totals more than $15,000 for each recipient (which generally does not result in any current tax liability). Even if you didn’t intend it to be a present, transferring cryptocurrency to someone else without paying for goods or services may count as a gift.
Sending cryptocurrency to oneself It’s not taxed to move cryptocurrency between wallets or accounts that you own. To continue tracking your prospective tax consequences for when you ultimately sell, you can transfer over your initial cost basis and date of acquisition.
Taxable as capital gains
Changing one cryptocurrency into another: For instance, if you use bitcoin to purchase ether, you technically need to sell some of your bitcoin first. The IRS views this as taxable since it is a sale. If you received more money for your bitcoin when you sold it, taxes would be due.
Using cryptocurrency to buy products and services: For instance, if you use bitcoin to purchase a pizza, you’ll probably need to pay taxes on the purchase. The IRS doesn’t really distinguish between buying and selling cryptocurrency. Before an asset can be traded for an item or service, it must be sold, and when it is sold, cryptocurrency becomes taxable for capital gains.
Income that is taxable
A few well-known people in 2021 accepted their wages in bitcoin, including NFL offensive lineman Russell Okung, who is probably paying income tax on it. If you followed Okung’s example and received payment from an employer in cryptocurrency, your cryptocurrency will be taxed as compensation in accordance with your tax bracket.
Receiving cryptocurrency in return for goods or services: If you accept cryptocurrency in exchange for goods or services, you must notify the IRS of the revenue.
Cryptocurrency mining: If you mine cryptocurrency, you’d probably need to pay taxes on your income based on the fair market worth (typically the price) of the coins at the time you got them. Mining cryptocurrency for a living is subject to self-employment taxes.
Earning staking rewards: Staking awards are taxed according to their fair market value on the day you got them, just like mining revenues are.
Earning more income: Holding some cryptocurrencies might result in a return. This qualifies as taxable income. The IRS does not treat this like interest you might receive from a bank, despite the fact that it is commonly referred to as interest.
Taxes on cryptocurrency acquired through a hard fork are based on a number of factors, including how the cryptocurrency is used and when it may be withdrawn from an exchange. Check out the most recent IRS guidelines on hard forks.
Receiving an airdrop: As part of a promotion or giveaway, a cryptocurrency firm may offer you an airdrop. Receiving an airdrop is taxed as income. Thus, you must include the sum in your tax filing. View the most recent IRS airdrops advice
Receiving additional incentives or rewards: This list isn’t exhaustive; there are several more occasions when you could get free cryptocurrency. These may include incentives like receiving $5 in bitcoin for recommending a friend to a cryptocurrency exchange or learning rewards. In any case, you must declare these as income.
What do I owe in cryptocurrency taxes?
What now, since it appears that portion of your cryptocurrency activities is taxable? By analysing your income, profits, and losses, you may get an idea of how much tax you will owe. This is what it indicates:
computing cryptocurrency income
If you pay taxes in the United States, you’re undoubtedly accustomed to seeing deductions for federal and state income taxes on your pay stubs. The income taxes that apply to other forms of income, such as mining, staking, and rewards, also apply to cryptocurrency earnings, albeit they are frequently not withheld or deducted.
You’ll typically owe what your tax bracket-appropriate income tax rate is when you submit your earnings. A word of warning: If you’ve made a lot of money from crypto activity, it may have an impact on your tax bracket, and you may wind up paying a higher tax rate on part of your earnings.
Making a capital gains and loss calculation
You must first know how much cryptocurrency you had before you started in order to determine how much you made or lost. The term “cost basis” refers to this.
You may determine if you have a capital gain or loss when you sell your cryptocurrency by deducting your cost basis from the sale price. If the proceeds are more than the cost basis, a capital gain has been realized. You will suffer a capital loss if not.
Capital gains: short-term versus long-term
Both federal and state (where applicable) capital gains taxes are levied. They might be long-term or short-term, and the amount of tax you will ultimately owe depends on how long you kept your cryptocurrency. You’ll often pay less than if you sold your cryptocurrency straight away if you kept onto it for more than a year.
A lower capital gains tax rate applies to long-term gains. Depending on your income, these rates—0 percent, 15 percent, or 20 percent at the federal level—vary. The 3.8 percent Net Investment Income Tax on gains or other income may also apply to higher-income individuals.Your regular income tax rate, which is typically a higher, less-favorable rate, is applied to short-term profits.
In order to realize losses or profits, you must sell your cryptocurrency, either by selling it for cash, exchanging it for another cryptocurrency, or using it to purchase an item or service. If you still possess the original shares, the profits remain unrealized.
Being aware of your capital losses
When you sell an asset for less than what you purchased for it, you’ve experienced a capital loss. However, you may use losses to your advantage. You can utilise losses to match dollar-for-dollar any other capital gains (including those from non-crypto assets, like stocks), possibly lowering your overall tax burden.
The maximum amount of losses you may declare each year to offset other income is $3,000, regardless of whether you have more losses than profits or none at all. Any leftover continues over to succeeding years until the whole loss amount is applied.
If you want to learn more about crypto, here’s an article about liquidity pools.