TLDR
Two things are certain in life – death and taxes. Though taxes do not concern the typical crypto bro, they are important for mainstream adoption. If your country imposes tax and your gains from crypto fall in the payable threshold, you might owe crypto taxes.
IRS classifies crypto as property, not currency, and charges capital gain tax. Holding taxable assets for less than 1 year falls under short-term gains. Gains from assets held for a year or more are considered long-term gains.
US charges 37% on short-term asset gains and 0% to 20% on long-term asset gains.
You must pay crypto taxes on crypto trades, debit card payments, buying and selling goods with crypto, airdrops, mining, staking, and other income from blockchain products.
Steps to do your US crypto taxes:
- Step 1: Download your crypto transactions from exchanges and wallets
- Step 2: calculate your gain or loss
- Step 3: Report Capital gains and determine tax liability on IRS Form 8949
- Step 4: File your Tax return, including IRS Form 8949
The best crypto tax software that handles all of the above is Koinly.
More details
Koinly is one of the top leading crypto tax software. It leverages automation to directly import crypto transactions from supported integrations and calculate gains and losses to determine tax implications. Koinly supports more than 700 integrations and is available in over 20 countries and functions using the tax law of the supported countries. The use of Koinly is flexible and also functions as a portfolio tracker, giving an overview of all your assets in one place.
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Multiple tax reports.
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Numerous country support.
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Easy to use.
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Flexible plans.
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Wide integration support.
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Does not accept cryptocurrency payments.
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Slightly expensive.
Taxable Income of Crypto: Regulatory Trends
Taxes are not fun, and you cannot get around them. The typical financial model was plagued with taxes and centralization of banks and governments, so Bitcoin emerged as a solution. However, it seems that, despite being decentralized, the crypto market is subject to taxes and government regulations in many countries.
Crypto exchanges are becoming more centralized, like traditional banks. First, the government’s behavior towards crypto was completely hostile, which is now changing to regulating these assets. Though it is necessary for the bigger perspective as crypto becomes mainstream with these actions, paying taxes is still a major concern. And if you’re already into crypto, you could owe taxes, too.
Do I owe crypto taxes?
Whether you own crypto tax depends on many factors, including your geolocation, the fair market value of your crypto, and how you hold and spend crypto. These factors may vary from one country to another.
However, the rules for imposing taxes are the same at the basic level. The complexity of these rules might even confuse experts who wonder how much tax they owe for their capital gains.
Generally, the crypto tax is imposed on you if you own more than a certain amount. Keeping crypto is not taxable unless you engage in trading, buying, selling cryptocurrency, or engaging in activities like mining or staking. You might owe crypto taxes if you fall into any of these categories.
Are all crypto transactions taxable?
Not all crypto transactions are taxable in any country because that’s not how taxation works. Some specific transactions are counted as taxable events. This depends on three factors: the country you are in, the purpose of the transaction, and the transaction amount.
You may be subject to taxes if you buy or sell crypto, exchange it for fiat currency, or buy goods or services with crypto. The tax is calculated by determining the fair market value of the crypto in profit and then counting the capital gains.
How much crypto tax is paid in the USA?
Those with losses or ordinary income don’t have to pay taxes anywhere. Likewise, you might fall in the tax category if you’re among the 42 million Americans who traded crypto last year.
In the USA, you must pay a 37% tax on short-term capital gains and 20% to 0% on long-term capital gains.
However, the percentage depends more on the number of capital gains, how long you have been holding them, and the transaction type.
However, the gains tax on NFTs is 28% for long-term gains. You can use online tax calculation tools like Koinly or contact a tax consultant for more insights.
Capital Gains Tax & Crypto
In the United States, crypto is treated as property and taxed once your gain is realized. This means if you are in profit and haven’t sold the crypto, the price might fluctuate, and your profits might vanish. This means that your gain is not realized. The profit is realized when you sell or use it for other taxable events.
There are two kinds of capital gains, and the percentage for paying taxes varies from one to another.
What are short-term capital gains?
Short-term capital gains mean you held your crypto assets for less than a year. There is usually more tax on short-term than long-term capital gains. Based on your tax bracket, the short-term capital gains are up to 37%.
Since long-term capital gains have lower taxes, holding crypto for 360 days and 366 days can make a lot of difference.
What are long-term capital gains?
Long-term capital gains taxes apply if you hold your assets for over a year. The tax amount paid on these gains depends on the tax bracket in tax returns. The crypto tax may vary from 0% to 20% based on your total tax return.
How does the IRS classify crypto?
IRS (Internal Revenue Service) is a US-based federal government institute responsible for collecting taxes and enforcing the Internal Revenue Code. IRS administers and enforces tax-based laws and provides guidance and resources to taxpayers.
The IRS classifies crypto as property, not a currency; therefore, the tax is collected based on long-term and short-term capital gains. The taxable event is evaluated through buying, selling, or exchanging cryptocurrencies, similar to other stocks and properties.
How much tax you will pay depends on the capital gain (short-term or long-term). The capital gain or loss is determined at fair market value. Your crypto income is taxed if your capital assets fulfill the taxable events.
If you buy and hold crypto for investment purposes, any increase or decrease in value will be calculated as capital gain or loss.
You might have to pay income taxes on your crypto as well. Crypto income taxed as income tax means you have been spending crypto as a payment method for goods and services. The crypto you receive will be taxed for this category at ordinary income tax rates.
How do you determine crypto gains or losses?
Calculate the difference between the buying and selling prices and subtract the cost basis to determine your crypto capital gains or losses.
For example, you bought 1 Bitcoin at $20,000 and sold it for $40,000. The difference is $20,000. However, you paid a $50 fee on different cryptocurrency transactions. So, after subtracting this cost basis, your realized gain is $19,950, a taxable income.
This seems easy as there is only one transaction involved. What if you hold multiple assets and trade those at different prices?
For such complex situations, as recommended, you can use an online crypto tax calculator like Koinly to get an overview of your total transactions.
Other crypto tax considerations
Crypto is not all about holding for profits; it can be earned in many ways, and the regulatory authorities keep working on taxing those methods. The following are the other methods to increase capital assets by getting virtual currency.
If you are not trading crypto, you might still owe taxes and have to pay cryptocurrency taxes.
Tax on crypto staking or mining
Mining is like a self-employment income technique; there are no tax implications if done on a lower scale. However, mining gets tax treatment if it is done at the commercial level, and the income from this is taxable.
According to the Difficulty regression model and due to Bitcoin halving, mining virtual currency is not as profitable as it used to be. However, with the bullish wave, mining becomes more profitable when cryptocurrency prices rise, and you might have to pay taxes.
Tax on crypto airdrops or hard forks
There are many ways to earn crypto; the capital assets fall under taxable income. You can earn crypto in the following ways:
- Referral rewards from a crypto exchange.
- Learn to earn campaigns.
- Browse to earn from Web 2.5 Browsers like Brave browser.
- GameFi: Rewards from P2E games.
- Shop to earn Rewards.
These are different potential ways to earn crypto and fall under the income tax category. The airdrops and hard forks are classified as crypto income, and you have to pay taxes based on the capital gains and losses based on the fair market value.
Technically, would you still owe taxes if you received an airdrop of $5 million in a coin and there was an exit scam?
- According to US tax guidelines, you must pay capital gains tax according to the coin’s fair market value only if you have realized your profit.
- If you did not realize your profit and the coin’s fair market value went to zero, you could claim the tax loss, and the tax effect will be zero.
- Suppose you are involved in a crypto transaction that can be taxable, like buying other virtual currency or goods. In that case, there is a tax liability on the net capital gain.
Crypto Tax on debit card payments
Crypto tax on debit card payments is conditional. If you used your crypto debit card to buy a virtual currency, says Bitcoin, the tax will depend on the net capital gain of that purchase.
For example, you bought 2 Ethereum at $500 each and sold on them a crypto exchange for $1500 each; at the fair market value, your realized capital gain is $2000. Therefore, you will pay capital gains taxes on those debit card payments.
Are crypto gifts and donations taxed?
Giving crypto as a gift can be taxable if you exceed the fair market value of $17,000 per person (gift tax exclusion for the 2023 tax year). For the lifetime, you can gift $12.92 million (in 2023) and enjoy tax exclusion.
However, to gift more than $17,000 to a single person or $12.92 million to multiple persons, you might have to pay capital gains taxes. You will have to fill out gift tax return Form 709. There’s an 18% to 40% tax based on the gift amount.
How are crypto-to-crypto transactions taxed?
In the United States, crypto-to-crypto transactions are taxable events as they may be subject to capital gains due to the rise and fall of the prices. The capital gains are determined on the fair market value of the taxable income.
The value of the capital asset is determined at the time of the crypto transaction minus the adjusted basis. The cost basis could be other expenses like transaction fees, gas fees, or other expenses involved in crypto transactions.
How are NFTs taxed?
According to the new regulations by the IRS, there is a long-term or short-term capital gain tax on NFTs when you sell or trade them. However, NFTs, sometimes, could be treated as collectibles and taxed as such instead of treated as property.
Under the collectible capital gains category, there’s a 28% gains tax on NFTs instead of 20% on the other capital assets. Your NFT will be deemed a property only if you sell it with short-term capital gains. If you hold an NFT for more than a year, it will be considered taxable income from Collectibale, and you will have to pay 8% more tax on it.
Receiving crypto as payment for goods
There are complex tax implications if you plan on receiving crypto as a payment for goods and services instead of dollars or other foreign currency.
First, you need to record the fair market value of crypto when you receive it. Also, you must report the income on your tax return to reflect in the income tax. Since the price of crypto fluctuates a lot, it cannot be easy to keep a record of the crypto transactions and to calculate the cost basis.
How are crypto taxes enforced?
IRS is responsible for managing, monitoring, and collecting taxable income taxes in the US. Here is how our crypto taxes are enforced:
- IRS audits individuals and businesses for tax evasion and can request financial records, including crypto transactions, to check your compliance with the tax laws.
- If the IRS concludes that you have not properly reported your crypto transactions and taxes, it can penalize you with fines and interest charges.
- If the tax returns you submit have major tax evasion, the IRS may press criminal charges against you.
- IRS may request centralized cryptocurrency exchanges to provide information on the users’ virtual currency assets. This information can be used to track transactions and capital gains.
What is the tax rate for crypto?
Federal income tax rates for crypto 2024 are 10% to 37% based on your virtual currency gains. The long-term capital gains taxes and short-term capital gains taxes vary between 15% to 20% based on the taxable income brackets.
How to report US crypto taxes?
To report your capital gains, you must classify yourself in which tax category you fall. It could be the Capital gains tax, crypto gift tax return, and Collectible capital gains tax. You might not owe taxes if you have an ordinary income. Once you know your taxable income and tax category, you can follow these steps to file crypto taxes.
Step 1: Gather all crypto Transactions:
You must gather all your crypto transactions to decide if your crypto income falls under the taxable income threshold or is just ordinary income.
Login to the exchange you have been trading on and download your account statement or transaction history. For example, on Binance, you can Find transaction history by hovering your mouse on the wallet tab and then clicking Transaction History.
From this page, you can click on Generate all statements to get the entire transaction history, choose transaction type, duration, and asset type from the below buttons, or even search transactions by their Transaction IDs. Once downloaded, you can mark your tax return’s taxable event and ordinary income transactions.
Step 2: Calculate your gain or loss:
We have already learned to calculate our long-term or short-term capital gains or losses above. Based on those calculations:
- If you have a capital gain, you have to pay a tax
- If you have an ordinary income, you’re exempted from taxes
- If you have a capital loss, you can use it to offset your other income taxes
Step 3: Report Capital gains and determine tax liability:
For capital gains tax, you must report your capital gains or losses on IRS Form 8949. Once you have done that, you can calculate your tax liability using capital gains or losses for the tax year.
Step 4: File your Tax return:
Now include your Form 8949 for filing your tax return and other forms and schedules. Since IRS regularly updates its tax percentages and guidance on cryptocurrency taxes, it is important to check its platform or seek help from a tax professional.
How can cryptocurrency tax software help?
Cryptocurrency tax software can help you automate several processes and help you file your capital gains tax more efficiently. Here is how cryptocurrency software can help you file your tax return.
- Automatic transaction tracking: Tax return software can easily track crypto transactions and help you. The software can automate the process of crypto transactions from various exchanges and wallets to filter capital gains tax data.
- Accurate gain/loss calculations: Calculating capital gains tax and getting the calculations right using the right cost basis is tiring. Also, there’s a probability of filing a tax return with wrong calculations. Crypto software can save you from that trouble.
- Tax optimization: Crypto tax software is an up-to-date tool that can notice various factors regarding your virtual currency assets. These tools can help you with tax reporting with tax-loss harvesting opportunities and providing tax planning tools.
- Audit Defense: Tax reporting software can help you generate comprehensive tax reports to help you self-audit your capital gains tax.
We Recommend Koinly
If you have been trading on multiple platforms and your transactions include multiple assets and blockchains, Tax filing software like Koinly can help you.
More details
Koinly is one of the top leading crypto tax software. It leverages automation to directly import crypto transactions from supported integrations and calculate gains and losses to determine tax implications. Koinly supports more than 700 integrations and is available in over 20 countries and functions using the tax law of the supported countries. The use of Koinly is flexible and also functions as a portfolio tracker, giving an overview of all your assets in one place.
-
Multiple tax reports.
-
Numerous country support.
-
Easy to use.
-
Flexible plans.
-
Wide integration support.
-
Does not accept cryptocurrency payments.
-
Slightly expensive.
You can Sign Up on Koinly to file tax returns, generate crypto tax reports, and submit them to the IRS. To get your transaction history and assets report, Koinly supports 300 crypto exchanges, wallets, and blockchains.
Is any crypto tax-free?
There is no specific crypto coin or token that is tax-free; however, there are some cryptocurrency transactions that are not taxable events.
- Buying crypto with fiat and holding it
- Donating crypto to a charitable organization
- Receiving a gift in crypto
- Gifting crypto up to $17,000 per person
- Exchanging crypto between your wallets
Tax on lost or stolen crypto
Before the Tax Cuts and Jobs Act, people could claim lost or stolen crypto as a loss; however, things have changed. With new regulations, the IRS does not allow people to claim lost or stolen crypto as a loss.
How to avoid crypto taxes legally?
- Holding Period: Holding cryptocurrencies for more than a year before selling
- Charitable Donations: Donating cryptocurrencies to a qualified charitable organization
- Loss Harvesting: Selling losing investments to offset capital gains can help reduce tax liabilities. This technique is known as tax-loss harvesting.
- Proper Record-Keeping: Keeping track of all cryptocurrency transactions, including purchases, sales, and trades, can help accurately calculate capital gains and losses for tax reporting purposes.
- Professional Advice: Seeking advice from a qualified tax professional or accountant
Summary
Governments regulate and tax most blockchain products, including crypto trading, NFTs, gifts, donations, and airdrops. Some transactions may be exempt from taxes, depending on your location. Options for filing tax returns include doing it independently, using dedicated software, or consulting with cryptocurrency tax professionals.
Profits derived from trading cryptocurrencies in the United States are subjected to capital gains tax, the rate of which can vary depending on the individual's income bracket and how long the crypto assets were held. Generally, short-term capital gains tax applies for assets held for less than a year and can range up to 37%. Long-term capital gains tax applies for assets held for more than a year and can range up to 20%. Furthermore, cryptocurrency transfers might be subject to specific tax reporting requirements if they exceed certain thresholds within the same fiscal year.
It is mandatory for individuals to declare all cryptocurrency activities, such as purchases, sales, and trades, on their tax filings. Neglecting to report these activities could lead to fines and accrued interest.
For federal taxation, digital currencies are considered property, and all the standard tax principles for property transactions are applicable to dealings involving digital currencies.
Moreover, our tax calculator has been enhanced for your convenience. With a single click, you can import your Binance transaction history into the calculator to receive a straightforward and detailed tax obligation estimate, tailored to your specific jurisdiction.
Sam Farao
Sam is our pioneering figure in affiliate marketing and the blockchain space (prior to co-founding Coinweb.com). His ventures, including Netpixel Media and Captana, have set new benchmarks in the affiliate marketing industry, leading to a notable acquisition by Speqta AB for 31.5 million Norwegian kroner ($3.8 million USD). Farao's foray into blockchain technology is marked by the Lightbulb Man project, a blockchain-based art collection featuring NFTs, which sold out in one day! This highlights his role in merging the worlds...
