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Tax On Crypto in The USA
The cryptocurrency tax season is rapidly coming. With so many investors entering the crypto market in the last year, they now have to deal with a new asset class when it comes to their taxes. Even for experienced investors, the regulatory landscape is always changing. Here’s everything you need to know about crypto taxes in 2021.
The Internal Revenue Service (IRS) of the United States declared in 2014 that bitcoin (BTC, +4.11%) and other cryptocurrencies should be classified as “property,” which means they are subject to capital gains taxation in the same way that traditional assets like equities and bonds are. Certain actions involving digital assets are, however, recognized as income and hence liable to income tax in specific circumstances.
Cryptocurrency Taxes In The United States
If you buy, sell, trade, or mine cryptocurrency, you have to pay cryptocurrency tax in the US.
Following actions are taxable in the United States:
1) Selling cryptocurrency for fiat cash is one of the most common capital gains tax events involving cryptocurrencies (U.S. dollar, British pound sterling, Japanese yen, etc.)
2) Buying goods and services with cryptocurrencies.
3) Exchanging one crypto asset for another, either through an exchange or directly between peers.
The following are examples of income tax events:
1) Getting cryptocurrency as a result of an airdrop
2) Any interest revenues from Decentralized Finance (DeFi) lending in cryptocurrency
3) Block rewards and transaction fees from cryptocurrency mining
4) Crypto earned via staking and liquidity pools
5) Accepting cryptocurrency as payment for services rendered, such as bug bounties.
It’s worth noting that, depending on how long you’ve held the assets, any trading losses can be used to offset capital gains as well as deduct up to $3,000 from your regular income tax (see below). Any additional losses can be carried over to the following year’s tax return. To qualify for a capital gains reduction, you must show a loss across all assets in a particular class.
How Much Tax Do You Pay On Crypto Gains?
The amount of capital gains tax you owe for your crypto activity in the United States is determined by how long you’ve owned your assets and your income tax bracket. So what is the tax on the crypto gains?
This is split into two sections:
1) Short-term capital gains: Gains or losses on crypto assets held for less than a year are taxed at the same rate as your income tax bracket. Here is a complete list of tax brackets for 2021-22. Any losses can be used to deduct up to $3,000 in income tax. Any additional losses can be carried forward as previously stated.
2) Long-term capital gains: Any gains or losses from crypto assets held for more than a year are taxed at a significantly lower crypto tax rate of 0%, 15%, or 20%, depending on individual or combined marital income.
Losses As A Result of Exchange Hacking or Theft.
Many crypto investors were perplexed by the huge changes to tax law that took effect in December 2017, especially those who had lost money through scams, hacks, or other means.
Personal casualty losses are now limited to “federally designated disasters.”
Many crypto investors and accountants were under the impression that this restriction would apply to their crypto holdings. According to the legal staff at CryptoTaxAudit, this is not the case.
Because crypto investment losses are “transactions engaged into for profit, while not associated with a trade or business,” they are classed as investment losses under tax code 165(c)(ii).
As a result, any crypto losses incurred as a result of frauds, thefts, or accidents are considered entire tax losses. These losses can be claimed as $0 proceeds transactions on Form 8949. This means that if you paid $15,000 for a bitcoin and it was taken as a result of an exchange breach, you might claim a loss of $15,000.
Losses From Ponzi Schemes Are Also Deducted
Losses from Ponzi schemes can be claimed as itemized deductions and are not subject to the $3,000 capital loss limits. You can deduct the amount you put into the scheme from your taxable income. The “Bernie Madoff deduction” is called after Bernard Madoff, the former chairman of the Nasdaq stock market, who was convicted of conducting one of the largest financial fraud enterprises in history. The main criterion for claiming a Ponzi deduction is that the loss must have been indicted.
Cryptocurrency Taxation: How To Be Ready For The Upcoming Crypto Tax Season
Now that you understand how your crypto assets are taxed, here’s how to prepare, file, and pay your taxes:
1) Keep correct records of all cryptocurrency purchases and sells: The IRS requires all cryptocurrency users to keep accurate records of all cryptocurrency purchases and transactions, including airdrops, lending interest, and any other activities listed above under capital gains and income tax events. The majority of popular crypto exchanges and platforms have built-in tax reporting facilities that create reports for you automatically. Third-party services, on the other hand, offer to perform all the legwork for you (see below).
2) Calculate your gains and losses: Once you have your complete transaction record, you can use a variety of websites or tax calculators to figure out how much you owe, or you can do it yourself, depending on how many trades you made over the year. The difference between the price at which you sold and the cost basis is used to calculate the amount (the original price you paid).
3) Complete Form 8949 and attach it to Schedule D: The appropriate tax form for reporting crypto capital gains and losses is Form 8949. The Schedule D is the most common tax form used to report total capital gains and losses. Any bitcoin profits must be reported on Schedule 1 of Form 1040, and self-employed cryptocurrency earnings must be reported on Schedule C.
4) Fill out the documents and pay any taxes due.
Best Crypto Tax Services That Are Available To Residents of The United States
The platforms listed below provide a variety of crypto tax services and can handle the complete procedure for you:
2) The Koinly
7) Zen Ledger
If your crypto tax position is exceptionally complicated, you should seek the advice of a competent tax accountant. This post is intended to provide general information and should not be interpreted as tax or accounting advice. When evaluating your personal tax status, always get professional advice from a tax accountant.