The cryptocurrency market is booming right now. Ethereum, on the verge of the Merge, is causing havoc, and investing in cryptocurrency seems like it’s emerging once again! So far, so good.
However, not many people know how to tax cryptocurrency, and avoiding paying the tax can have very nasty consequences. That’s why it is crucial to get things done right from the start.
In this article, we will tell you more about crypto taxes and how to do things the right way, in order to avoid unnecessary problems.
Do you have to pay crypto taxes?
Unlike cryptocurrency, stocks were always taxed. Not long ago, however, the US imposed taxes on cryptocurrency trading, as it has become prevalent. Regardless if you buy Dogecoin for short or long-term profit (or any other cryptocurrency), you should pay a due tax.
Pro tip: Don’t try to avoid paying your taxes, as you will face serious issues, especially given the bad reputation of cryptocurrency as a money-laundering asset.
Is crypto taxing harder?
That’s a question many people are asking. Crypto taxation is an interesting topic that even some accountants may have issues with. But it doesn’t mean it’s hard. There are a few key things to understand when it comes to crypto taxes, and once you do, filing your taxes will be a breeze.
Tax time is here, but there’s still a lot of confusion about how cryptocurrency will affect your taxes. Unlike most forms of currency, cryptocurrencies aren’t regulated or printed by any government or bank — they’re decentralized and exist purely online.
This makes it difficult to track where the money originates from, its value in the crypto market, and whether or not you’ve sold a digital asset for fiat currency (traditional paper dollars). In general, crypto taxation is a harder process than regular assets, since any central authority does not regulate cryptos.
Are all crypto activities taxed?
In the US, the IRS treats cryptocurrency like traditional currency, making it subject to capital gains and losses taxes. The agency considers it property — not a stock or a bond — so holdings are taxed as if they were shares of Google or Apple sold through a broker.
As such, crypto is subject to capital gains taxes (when you sell your coins for more than you bought them for) and/or income tax (if you earned crypto using your own skills). Transactions that result in a gain or loss are called taxable events; those that don’t are called non-taxable events.
Which events are not subject to taxes?
As with everything, there are some exceptions to the rule. Let’s see which they are!
Crypto holding
Just buying and owning crypto isn’t taxable on its own. In most cases, taxes are incurred later on when you sell your crypto for fiat currency. So, if you simply buy to own crypto, there is nothing to declare in front of the IRS.
Gifts
Receiving cryptocurrencies as a gift can seem confusing, but it doesn’t have to be! If you are one of the lucky ones to receive crypto gifts, you don’t have to pay taxes for them. Both givers and receivers don’t have to declare it unless the amount surpasses $15,000.
Self-Transfers
When you transfer crypto between wallets or accounts that you own, it’s not taxable. However, when you buy and sell crypto on an exchange or trade it with other investors, any time gains or losses are realized (decimals matter here, folks), those are taxable events.
How much do you owe the government?
Fortunately, you don’t owe money if you make small profits on long-term investments. Within $41,675, you owe 0%. That amount is raised to $83,350 for couples who file jointly and up to $55,800 for heads of households.
Between $40,676-$459,750 you owe 15%, for couples the sum is between $83,351-$517,200, and for heads of households – from $55,801 to $488,500.
For any greater amount the tax applied is 20%.
Short-term crypto gains taxes
Different tax percentages apply to short-term crypto trading than to long-term crypto investments. Short-term trading is taxed at a higher rate than long-term investments. This is because the government views short-term trades as speculative and not as serious investments. So if you trade cryptos without HODL-ing, there are different rules that are applicable.
Single people
Let’s see how things are for single people:
- 10% – anything between $0 and $10,275
- 12% – anything between $10,276 and $41,775
- 22% – anything between $41,776 and $89,075
- 24% – anything between $89,076 and $170,050
- 32% – anything between $170,051 and $215,950
- 35% – anything between $215,951 and $539,900
- 37% – anything above $539,900
Married couples who file jointly
- 10% – anything between $0 and $20,550
- 12% – anything between $20,551 and $83,550
- 22% – anything between $83,551 and $178,150
- 24% – anything between $178,151 and $340,100
- 32% – anything between $340,101 and $431,900
- 35% – anything between $431,901 and $647,850
- 37% – anything above $647,850
Heads of households
- 10% – anything between $0 and $14,650
- 12% – anything between $14,651 and $55,900
- 22% – anything between $55,901 and $89,050
- 24% – anything between $89,051 and $170,050
- 32% – anything between $170,051 and $215,950
- 35% – anything between $215,951 and $539,900
- 37% – anything above $539,900
All the information is based on the IRS.
Summary
Paying taxes on cryptocurrency doesn’t have to be a burden. While it doesn’t look so great initially, these numbers are available on many sources (including here). If you do everything on time, you won’t miss a thing! Just make sure you have a good accountant if you trade millions worth of cryptocurrency, as you don’t want to gamble on an industry that already has a name.
For those looking to trade large volumes of crypto, over-the-counter (OTC) trading may be a suitable option. Read more about OTC trading and its benefits.
