Although taxes are never the most exciting topic, they are important. And if you want to protect yourself from financial penalties or worse, it's worth learning about crypto taxes!
Despite the fact that cryptocurrencies are still in their infancy, the IRS and other organizations are working hard to enforce tax compliance. Anyone who buys or sells cryptocurrencies in the United States must report profits and losses to the IRS every year.
Cryptocurrency Tax Reporting
When it comes to crypto, you need to be well organized throughout the year if you want to report your taxes correctly. For example, you need to make sure you keep a record of every cryptocurrency transaction, including the amount you spent and the market value of the currency at the time you used it.
You can track and manage this data yourself or by using a blockchain that tracks this information automatically. In addition, some platforms offer portfolio and transaction tracking so you can manage your digital assets and ensure you have quick and easy access to your crypto tax data.
But what tax form do you need for cryptocurrency? On IRS form 8949, capital gains and losses from cryptocurrencies are recorded. If you are attempting to file crypto taxes, especially for the first time, it is a wise choice to contact a licensed accountant to help you and to answer any questions.
How Much Tax Will I Pay on My Crypto?
The amount of tax you pay will depend on a few factors. The amount you spend or swap, your tax bracket, and the length of time you have owned the cryptocurrency will affect the amount of tax you pay. For example, if you have held it for less than a year, you will pay taxes at your standard income tax rate. However, if you have held your crypto for more than a year, you will incur capital gains taxes.
How do I Avoid Paying Taxes on Cryptocurrency?
Aside from not using your cryptocurrency, there are no legal ways to not pay your taxes. If the value of your cryptocurrency has increased, you will eventually have to pay taxes when you sell it, use it, convert it into money, exchange it, or trade it.
Do I Pay Taxes If I Don't Sell My Crypto?
Taxes are only due on cryptocurrencies when a profit is realized, which can only happen if you sell, use, or trade it. Therefore, owning cryptocurrencies is not a taxable event on its own.
What is a Taxable Event?
Taxable events that impact an individual's cryptocurrency investments must be declared for tax purposes. Any event resulting in a person receiving gains is taxable.
It is important to understand the circumstances that fall under each of these two tax events, as they are taxed differently:
Capital gains tax events
The following are short-term and long-term capital gains tax events:
Trading cryptocurrencies for fiat money or using these currencies to pay for products and/or services
Trading or exchanging one kind of cryptocurrency for another
Investors should note that transferring assets from one wallet or exchange to another does not result in capital gains or losses and is, therefore, not a taxable event.
Income tax events
Taxable events include the following:
Acquiring crypto through an airdrop
Getting cryptocurrency interest from decentralized financing (DeFi)
Earning cryptocurrency through staking and liquidity pools
Earning cryptocurrency through mining activities
Especially in the US, where there are many taxable events, investors need to pay close attention to the country's reporting requirements. But, of course, at any stage you can check your tax rate with a cryptocurrency tax calculator or consult an expert, such as an accountant.
Non-taxable events
The following events are not taxable:
1. Donation of cryptocurrencies to a tax-exempt non-profit or charitable organization.
2. If cryptocurrency is purchased with cash and held or stored only.
Remember, depending on how long you own your cryptocurrencies; you can deduct up to $3,000 from your regular income taxes. Trading losses can also be carried over to the following tax year or used to reduce capital gains.
Source: https://coinledger.io/blog/cryptocurrency-tax-rates
How to Minimize Crypto Taxes
Now that you know more about crypto taxes, which are essentially capital gains taxes, you can plan to reduce the amount of money you have to give the IRS. Here are some helpful tips to lower your tax liability.
Wait for Your Short-Term Gains to Turn Into Long-Term Gains
As described above, different capital gains rates apply depending on how long you hold your crypto. Therefore, you should ensure you hold your cryptocurrencies long enough to convert your short-term earnings into long-term gains if you want to reduce your tax burden. Although it's not straightforward, if you can hold your cryptocurrency for at least a year before selling it, you will most likely pay a lower tax rate on any capital gains.
Offset Capital Gains with Capital Losses
By offsetting capital gains against capital losses, crypto investors can reduce their tax burden. This is done by deducting losses on cryptocurrencies you sold during the year from the taxable gains on other investments that increased in value.
But be careful: this tactic has its limitations. It would be best if you first offset losses of the same type when recognizing investment losses. For example, long-term losses reduce your long-term gains, while short-term losses first reduce your short-term gains.
Gift the Assets to a Family Member
Gifting your cryptocurrency to family members could be another way to reduce your crypto tax payment.
The IRS allows tax-free gifts of up to $16,000 per beneficiary per year. If the beneficiary has a low income they do not have to pay taxes on the appreciation when they transfer it. So, at the very least, you pay less tax than if you sold the cryptocurrency yourself.
Hire a Certified Public Accountant Who Specializes in Crypto Tax
Navigating tax law on your own can be a challenge. For this reason, you should think about hiring an expert. Even though hiring a good accountant can be expensive, many investors feel it is worth the investment.
