Crypto can be a highly lucrative venture, but with profit (and sometimes without it) come tax considerations and the risk of huge issues. The IRS is the last enemy you need! Here's a quick guide on when and how to file crypto taxes in 2024.
Many crypto tax pitfalls lurk in the shadows of the buoyant market. For example, if you raise $10 billion and then lose it, it's taxable!
While one rarely finds themselves in such an extreme situation, it's crucial to remember crypto tax information as the April 15 deadline to file returns to the federal government approaches.
Selling crypto is not the only crypto tax event
Crypto tax is owed on events beyond selling crypto for fiat. Exchanging one crypto for another triggers taxable events, and ignorance of them results in negative outcomes. Many are tempted to reinvest their crypto profits into another crypto without paying tax, but they face huge tax debt if their portfolio subsequently plummets.
You owe crypto tax on crypto-for-crypto trading in many countries, not just the US. You might profit from a memecoin but lose everything when the market shifts, and the authorities will still expect their share.
Applicable rates
The IRS considers crypto to be property, so crypto taxes are equivalent to regular income tax or short- and long-term capital gains for stocks. Depending on your income and tax bracket, short-term capital gains from crypto that you owned for less than a year are taxable at rates from 10%-37%.
The IRS taxes crypto received from staking as regular income at the time of receipt and then on later profit as capital gains. The crypto tax on long-term capital gains from crypto you owned for more than a year is from zero to 20%. The tax on NFTs that are considered collectibles may be 28%.
When is capital gains tax owed on crypto?
Because the IRS sees crypto as a capital asset, capital gains tax is due whenever you dispose of crypto. In the US, the ways to do that include selling crypto for fiat, spending crypto on goods or services, and trading crypto for crypto. The last category when crypto tax is due includes tokens, stablecoins, and more. Capital gains tax is owed on any profit you make from the disposal. In terms of the long-term capital gains tax for crypto, you will owe nothing if you earned less than $44,626 in 2023, including your crypto.
Calculating capital gains crypto tax
When you spend, trade, or sell crypto, you make a capital gain or a loss. To calculate the respective amount, you need to establish the cost basis, which includes the sale price and any associated fees. If the crypto was given to you for free, you calculate the cost basis according to the fair market value in dollars on the date you got it.
To find the gain or loss, subtract the cost basis from the purchase price. You owe crypto tax on any gains you made. If you have a loss, no tax is owed, but it makes sense to keep track of losses because they can be offset against gains in what is known as crypto tax harvesting. This article will go into more detail later.
You pay the same rate as the one on your income for short-term capital gains according to the tax brackets. Check the 2024 rates here.
Are there any crypto tax breaks?
Yes, there are. If you gift someone crypto under $17,000, you don't owe crypto tax under an annual gift tax exclusion. This can help you pay lower taxes overall by availing yourself of lower income tax rates in your household. You won't be charged gift tax if you gift crypto worth more than $17,000 either, as long as you haven't crossed the lifetime tax exemption threshold of $12.92 million. You may need to file Form 709, however.
What happens if you lose your crypto in a scam or hack or because you lost your wallet keys? Obviously, you won't owe crypto tax in this case, but you also can't claim stolen or lost crypto as a capital loss.
Taxing crypto as income
The IRS views many crypto transactions as income and subjects them to income tax. Essentially, when you're perceived as 'earning' it, you'll have to pay crypto tax in the form of income tax. When is this kind of crypto tax owed? The IRS views the following transactions as earning additional income:
· Mining crypto as a hobby.
· Getting paid in crypto.
· Receiving an airdrop.
· Staking rewards.
· Receiving new coins from a hard fork.
· Referral bonuses.
· Earning reward, governance, or liquidity pool tokens on DeFi protocols.
· Earning interest through lending protocols.
· Learn to earn rewards.
· Browse to earn rewards.
· Watch to earn rewards.
· GameFi rewards.
How to determine crypto income
To calculate crypto income, take the fair market value of the assets in US dollars on the date you received them. This is how much you earned and what crypto tax will be charged at the federal income tax rate and your applicable state income tax rate.
You won't pay crypto tax when:
· HODLing crypto.
· Buying crypto with fiat currency.
· Moving crypto between your own wallets.
· Gifting crypto below the lifetime gift limit.
· Creating an NFT.
Donations in crypto are tax deductible. If you're donating more than $5,000 to a charity, you might need to talk to a qualified appraiser.
Strategies to reduce crypto tax
Now, here are two ways to reduce your crypto tax. As you've noticed, the crypto tax rates on holding crypto for over a year are much lower than those on holding it for less than a year. Tax-loss harvesting is the second approach. It involves selling crypto at a loss at the end of the tax year or when the market turns bearish. This offsets capital gains and can reduce the taxes you owe. In the US, there is no limit on how much crypto you can sell at a loss. If the gains are lower than the losses, the annual tax-deductible amount is up to $3,000. You can carry any additional losses forward to offset income tax or capital gains tax in the future.
The wash sale rule
When you sell a security or crypto at a loss and then repurchase the same or similar security or crypto to obtain tax benefits, it's considered a wash sale. The wash sale rule makes it illegal to sell crypto or securities at a loss and reacquire them within a month so people do not generate fake losses to lower their taxes. The rule does not apply to cryptocurrencies yet, but there have been proposals to that end. You should be cautious before carrying out activities that could be seen as wash sales in an effort to obtain crypto tax benefits.
How to report crypto tax
You use Form 8949 and Form Schedule D (1040) to report capital gains, capital losses, and crypto disposals. Form Schedule C (1040) or Form Schedule 1 (1040) is used to report crypto income for the purpose of crypto tax.
Final thoughts
Crypto and memecoin euphoria always gives way to the sobering reality of crypto taxes. It is essential to keep accurate records. If you understand how crypto taxes work and report them correctly, you'll ensure your successful investment doesn't turn into a tax nightmare. Consult a crypto tax professional for further information.
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