Tax laws

Cryptocurrency Tax Laws: What U.S. Taxpayers Should Know As Tax Day Approaches


By Seth Wilks, Director of Government Relations

Have you traded or sold Bitcoin, Ether, or other digital currencies in 2020? If so, you will have the information you need to report on your tax return. With the tax deadline fast approaching, TaxBit CPAs and tax lawyers are breaking down cryptocurrency tax laws to make this process as easy as possible. Contrary to popular belief, crypto taxes don’t always mean bad news. If you sold cryptos at a loss or gave away or offered cryptos in 2020, you may be able to reduce your tax liability.

Let’s start with the basics.

Do you pay taxes on cryptocurrency?

Yes, you pay taxes on cryptocurrency gains when you have an asset, much like stocks. This may include: selling your crypto for cash, exchanging one cryptocurrency for another, or using crypto as a form of payment. You can also pay taxes on cryptocurrency earned as income through mining, staking, or paying in crypto.

And the IRS is serious about enforcing this. This year, for the first time, the IRS added a new question to Form 1040 that asks taxpayers: “At any time in 2020, have you received, sold, sent, traded, or otherwise acquired a financial interest in any currency? Virtual ? “
If you don’t report your crypto taxes, the IRS may prove intentional disregard for knowingly failing to report them.

However, not all crypto business receives the same tax treatment, and this is where things can get confusing for crypto investors. To clarify, let’s take a look at how cryptocurrency is taxed and how these tax laws apply to some of the more common crypto activities.

What are the tax rates for cryptocurrencies?

If you received cryptocurrency as income, it will be taxed at the rate of your ordinary income. If you have cryptocurrency, however, all profits will be taxed at the capital gains tax rate, which varies depending on how long you hold the asset and your income.

If you have held the crypto for more than a year before selling, your capital gains will be taxed at the long-term capital gains rates shown in the table below.

Long-term capital gains tax rate 2020

Tax rate

Income – Single

Income – Married Joint deposit

Income – Head of household

0%

$ 0 – $ 40,000

$ 0 – $ 80,000

$ 0 – $ 53,600

15%

$ 40,001 – $ 441,450

$ 80,001 to $ 496,600

$ 53,601 – $ 469,050

20%

$ 441,451 +

$ 496,601 +

$ 469,051 +

Alternatively, if you sold the crypto after holding for less than a year, those gains will be taxed at short-term capital gains rates, which equals your ordinary income rate in the table below.

Short-term capital gains tax rate 2020

Tax rate

Income – Single

Income – Married Joint deposit

Income – Head of household

ten%

$ 0 – $ 9,875

$ 0 – $ 19,750

$ 0 to $ 14,100

12%

$ 9,876 – $ 40,125

$ 19,751 – $ 80,250

$ 14,101 – $ 53,700

22%

$ 40,126 – $ 85,525

$ 80,251 – $ 171,050

$ 53,701 – $ 85,500

24%

$ 85,526 – $ 163,300

$ 171,051 – $ 326,600

$ 85,501 to $ 163,300

32%

$ 163,301 – $ 207,350

$ 326,601 – $ 414,700

$ 163,301 – $ 207,350

35%

$ 207,351 – $ 518,400

$ 414,701 – $ 622,050

$ 207,351 – $ 518,400

37%

$ 518,401 +

$ 622,051 +

$ 518,401 +

Common crypto activities and how they are taxed

Buy crypto

Good news for all crypto-hodlers! The purchase of Bitcoin or other cryptocurrencies is not in itself a taxable event. You only pay taxes on this crypto when you have it available (exchange, sale or use as a means of purchase). However, it is still important to keep track of this activity as it sets your cost base when you get rid of your crypto.

Sell ​​crypto for fiat

The sale of crypto for fiat currency is taxable as property, meaning any gain will result in capital gains tax. You will have to report your capital gains and losses on IRS 8949. For example, if you buy $ 2,000 of ETH (this is your base price) and later sell it for $ 2,500, you will incur a gain. in capital of $ 500.

Exchange cryptos for cryptos

Swapping one coin for another is taxable again as property and will need to be reported on your IRS Form 8949. For this example, let’s say you bought 2 Litecoin for $ 500 (that’s your base price ). Later in the year you traded all of that Litecoin for ETH. When you made this transaction, the value of Litecoin had increased and the new value of 2 LItecoin was $ 750. You would have realized a capital gain of $ 250.

It is important to note that if you were just transfer coins from one exchange or wallet to another, this is not a disposition and therefore not taxable.

Use crypto to buy goods or services

Using crypto as payment for goods and services constitutes an assignment and any gain or loss should be reported on Form 8949. Note that this includes all purchases made on cryptocurrency debit cards!

Cryptocurrency mining or staking

Any crypto earned through mining or crypto staking is taxable as income. Unlike the examples above, all profit here will be subject to regular income tax rates, not the capital gains tax rate. The amount taxed will be equal to the fair market value of the asset at the time the coin is mined, not sold.

Note that if you then sold this crypto, it would trigger a second taxable event and you would be required to report this capital gain or loss on Form 8949.

Airdrops and hard forks

Any crypto received from an airdrop, resulting from a hard fork or other reason, is taxed at the ordinary income rate. The taxed amount is the fair market value of the crypto at the time it was received.

Get paid in crypto

Like cryptocurrency mining or staking, any money earned by being paid in crypto is taxable as income and must be reported on Form 1040.

What about crypto losses?

Cryptocurrency losses must be reported on your IRS 8949, just like cryptocurrency gains. There is, however, a silver lining here. If you disposed of your crypto with a capital loss, you can use that loss to offset your capital gains or claim the capital loss deduction.

With the capital loss deduction, you can deduct up to $ 3,000 in capital losses per year. And, if you have suffered net capital losses of more than $ 3,000, you can carry that amount forward to future years to offset the capital gains or claim the capital loss deduction again.

Gifts and donations in cryptocurrency

More good news ! The donation or donation of cryptocurrency is not a taxable event, so you will not recognize any gain or loss when donating or donating.

In addition, if you have held the cryptocurrency for more than a year prior to donating, then you will be entitled to the itemized charitable deduction corresponding to the fair market value of the cryptocurrency at the time of the contribution.

If you donate after holding the cryptocurrency for less than a year, you are still entitled to the itemized charitable deduction, but your deduction will be limited to the amount you got the crypto (your cost base).

It is important to note that the deduction only applies to donations to a qualified charity. Other gifts, such as a graduation giveaway or crypto crowdfunding, are not eligible for the deduction.

TVN

In most cases, NFTs (non-fungible tokens) are subject to the same tax laws as fungible cryptocurrencies. If you are an artist who made money selling DTV, this amount will need to be reported as income on your tax return. And if you invest in NFTs, all profits generated from sales or trading will be taxed as property and subject to capital gains tax.

Keep these most common activities in mind when filing your taxes:

  • If you purchased an NFT using a fungible crypto token like Bitcoin or Ether, you will need to report your capital gains (or losses) from selling the crypto.
  • If you sold an NFT for another NFT, you must report the capital gains or losses
  • If you have sold an NFT for a fungible crypto asset, you must report any capital gains or losses.

Quick Tips for Saving Crypto Tax:

As you have probably understood from the above, taxes on cryptocurrencies can be convoluted, especially for those with a lot of transactions. However, when you understand crypto tax laws, you can identify the ways the laws save tax. Here are some tips you can apply now and throughout the year to save money on your crypto taxes:

  • Donate and gift valued crypto assets to avoid capital gains tax (and for donations, claim the charitable tax deduction!)
  • Claim the crypto capital loss deduction up to $ 3,000 per year (and carry over any loss greater than $ 3,000 to future years)
  • The wash sell rules don’t apply to crypto, so sell your crypto assets in a losing position and buy them back to offset any capital gains.

Get the Guide to harvesting tax losses for cryptocurrency trading to learn more about how to do it smart to minimize your taxes.

If you are delaying your crypto taxes out of fear or uncertainty, TaxBit is here to help. Founded by CPAs and tax lawyers, TaxBit automates all aspects of crypto tax reporting from start to finish. Start now with 10% off.