If you buy, sell, mine, receive, or hold cryptocurrency, here’s what you need to know about takes.
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What do you need to report on your tax return?
Right at the top of your tax return under your name and address, you’ll see, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” You’ll check yes or no here, then add any appropriate forms to your tax return.
- Receive means you got crypto for selling something, for performing services, from mining, as an interest payment on your crypto holdings, or other transactions that increased the number of coins or fractions of coins you have.
- Sell means you cashed out for fiat currency or sold one coin for another.
- Exchange means trading one coin for another. For cryptocurrency, exchanging is the same as buying and selling. The IRS has said the tax concept of a like exchange does not apply to cryptocurrency. A like-exchange is a special tax move where you can avoid a taxable event when trading similar assets, like one piece of real estate for another. The IRS includes exchange in the crypto question in case you don’t know you can’t do this.
- Otherwise dispose is basically the IRS trying to close any attempts to get out your dictionary and create a loophole by saying you weren’t selling.
When do you have to report receiving cryptocurrency?
- If you buy coins, you don’t have to report that. You should keep track of what you paid because that reduces what you owe in taxes.
- If you sell goods or services or earn wages in cryptocurrency, that is taxed the same way as if you were paid in cash. Report the fair market value in dollars at the time you received the payment.
- Cryptocurrency interest is subject to ordinary income tax rates like bank account interest.
- Cryptocurrency mining has been ruled a business activity subject to self-employment taxes by the IRS.
When do you have to report selling cryptocurrency?
You have to report selling cryptocurrency when you:
- Sell for cash
- Sell for another coin
- Use it to pay for something. When you pay, the selling price is the fair market value in dollars of what you bought.
All sales are subject to capital gains taxes. Your capital gain (or loss) is your selling price minus what you originally paid for that coin.
Tip: You may be able to avoid capital gains taxes by donating your appreciated cryptocurrency to charity.
How do I keep track of crypto taxes?
The only way to keep track of your crypto taxes is to record every detail of every transaction. Unlike traditional brokerage accounts, many crypto exchanges don’t keep all of the information described above.
You can use a spreadsheet or use online services like CoinTracking or CoinTracker.
What taxes do you have to pay on cryptocurrency?
There are three common tax situations you might be in.
Do you pay taxes on cryptocurrency profits? Yes.
Selling cryptocurrency is subject to capital gains tax. Your taxable gain is your selling price minus your purchase price.
The capital gains tax rate depends on how long you held the cryptocurrency.
- Long-term capital gains, which is cryptocurrency you held longer than a year, are subject to a 0% to 20% capital gains tax rate.
- Short-term capital gains, which is cryptocurrency you held under a year, are subject to your regular income tax rate of up to 37%.
If you sell at a loss, you can usually use that to offset your gains on profitable sales.
Some platforms, like the Donut App, pay you interest on your cryptocurrency holdings. You’ll normally pay your ordinary income tax rate just like you would for bank interest.
Sale of Goods or Services
If you received cryptocurrency for something you sold or work you did, the same tax rules apply as if you were paid in cash. The taxable amount is the fair market value of the cryptocurrency when you received it.
For example, you have a lawn mowing business and customers paid you $5,000 in cryptocurrency and $95,000 in cash during the year. You’ll report $100,000 in income before expenses.
If you later sell the cryptocurrency you receive, any increases in value since you received it will usually be subject to capital gains tax.
How to Avoid Taxes on Crypto Gains
There are several ways you can avoid taxes on crypto gains.
- Spread your sales out over several years so you stay in a lower capital gains tax bracket.
- Use capital losses from other cryptocurrencies or other investments to offset your gains. If you haven’t sold anything at a loss, consider using tax loss harvesting.
- Donate appreciated cryptocurrency to charity. You don’t pay capital gains tax on the coins you give to charity.
Does the wash sale rule apply to crypto?
The wash sale rule is a rule that says if you sell a security at a loss and replace it with the same or substantially the same security within 30 days, you aren’t allowed to claim the capital loss.
The wash sale rule currently does not apply to cryptocurrency trading. The IRS treats cryptocurrency as an asset not as a security.
There was a proposal in Joe Biden’s Build Back Better act to extend the wash sale rules to cryptocurrency. The proposal did not pass.
For future planning if a crypto wash sale rule ever passes, the same or substantially the same would likely mean the same coin. So if you sold Bitcoin at a loss, you likely wouldn’t be able to buy Bitcoin or some other type of investment in Bitcoin within 30 days. You could still sell Bitcoin and buy Ethereum or another coin.