Welcome; this article will explain how crypto trading, earning, income, and gain are taxed.
we will answer the following questions
- What are cryptocurrencies defined as?
- What is a crypto-taxable event?
- What is needed to fulfill a crypto transaction tax file?
- What are the challenges with crypto tax compared to other taxes?
What are cryptocurrencies defined as?
In most countries, including the US, cryptocurrencies are treated as property for tax purposes. Therefore, they are not treated as currencies.
Therefore, cryptocurrencies are comparable to investing in stocks, bonds, and real estate for tax purposes.
- Alice buys 1 Bitcoin at $10.000
- Alice sells 1 Bitcoin for $12.000
- Alice will owe a percentage of $2000 in tax
How much USD will I owe in tax?
In the US, this depends on your tax bracket and if you hold your crypto for a long-term or short term.
Read more about long-term and short-term capital gains below.
Short term VS Long term capital gains
You separately report short-term and long-term capital gains on your tax return via IRS Form 8949.
Short-term crypto gain
A short-term gain occurs when you buy, sell, or exchange a crypto asset within one year. Short-term gains are subject to your marginal tax rate — that’s the rate you pay on your income.
This rate ranges from 0% to 50%, depending on your location and total income for the year.
Long-term crypto gain
A long-term gain occurs when you buy, sell, or exchange a crypto asset after holding it for a year or longer. Long-term gains are subject to different tax rates called the capital gains rate.
There may also be additional long-term state taxes. For example, the long-term total rate in New York can be as high as 31.5% (20% + 11.5% New York state rate) if you’re in the top income bracket.
See the capital gains on the IRS webpage for up to datup-to-dateion regarding this.
What is crypto taxable event?
A taxable event triggers a capital loss or capital gain tax reporting requirement.
IRS defines a cryptocurrency taxable event in their 2014 guidance as
- Selling a cryptocurrency
- Trading or exchanging a cryptocurrency
- Buy goods or services for a cryptocurrency
What is NOT a crypto-taxable event?
- Buy and hold a cryptocurrency (not dispose of it)
- Sending a crypto wallet to wallet, exchange to exchange (transfers)
Mine crypto is treated as receiving an income and is a taxable event – a special event
How do I file crypto taxable transactions?
IRS form 8949, same as capital gains and losses
Examples of taxable events and not taxable events.
- Buy 0.1 Bitcoin for $100 at Coinbase – NOT a taxable event
- Send the 0.1 BTC to Binance – NOT a taxable event
- Trade the 0.1 BTC for 0.5 ETH – Taxable event
- Sell 0.5 ETH for $200 – Taxable event
Challenges with crypto tax reporting
There are some challenges with crypto tax reporting you should be aware of.
Let´s make a bullet list of some of the challenges
- Difficult to get the USD (or your preferred fiat) value of your crypto transaction. It would help if you always had your transaction (cost basis and sell price) in your tax fiat currency.
- Hard to aggregate all your transactions in one place or one system. Exchanges can´t give their users accurate tax reports for all information needed for 8949.
- Difficult to keep track of gains or losses on a transaction. Exchanges can only do this within the crypto exchange. However, once you transfer the coins outside the business, they lose the data and the ability to give a tax report with enough details.
You need to collect all crypto transaction data into one software. See our comparison article between the two most potent crypto-automated tax software, Koinly VS Cointracking.
Crypto tax software to automate the process
With a crypto tax software you can automate the whole tax reporting process by importing all transactions into one specialized software.
Once you have imported all transactions, all calculations are automated and you can easily calculate and file your cryptocurrencies transactions for the tax authorities.