How is crypto trading, earning, income and gain taxed

How is crypto trading, earning, income and gain taxed?

Welcome, in this article we will explain how crypto trading, earning, income and gain is taxed?

we will answer the following questions

  • What are crryptocurrencies 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. They are not treated as currencies.

Therefor, cryptocurrencies are comparable to investing in stocks, bonds, real estate for tax purposes.

Example

  1. Alice buys 1 Bitcoin at $10.000
  2. Alice sells 1 Bitcoin for $12.000
  3. Alice will owe a percentage of $2000 in tax

How much USD will I owe in tax?

In US this is dependent  on your tax bracket and if you hold your crypto for a long-term or a short term.

Read more about long-term and short-term capital gains below.

Short term VS Long term capital gains

On your tax return, via IRS Form 8949, you separately report short term and long term capital gains.

Short-term crypto gain

A short-term gain occurs when you buy and then 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 your total income for the year.

Long-term crypto gain

A long-term gain occurs when you buy and then sell or exchange a crypto asset after holding it for a year or longer. Long term gains are subject to a different set of tax rates, called the capital gains rate. 

There may also be additional long-term state taxes. In New York, for example, the long term total rate can be as high as 31.5% (20% + 11.5% New York state rate), if you’re in the top income bracket. 

For up to date information regarding this, see the capital gains on the IRS webpage.

What is crypto taxable event?

A taxable event triggers a capital loss or capital gain tax reporting requirement.

IRS define a cryptocurrency taxable event in their 2014 guidance as

  1. Selling a cryptocurrency
  2. Trading or exchange a cryptocurrency
  3. Buy goods or services for a cryptocurrency

What is NOT a crypto taxable event?

  1. Buy and hold a cryptocurrency (not dispose it)
  2. Sending a crypto wallet to wallet, exchange to exchange (trasnfers)

Special events

Mine crypto is treated as receiving an income and is taxable event – special event

How do I file crypto taxable transactions?

IRS form 8949, same as capital gains and losses

Example of taxable events and not taxable events.

  1. Buy 0.1 Bitcoin for $100 at Coinbase – NOT taxable event
  2. Send the 0.1 BTC to Binance – NOT taxable event
  3. Trade the 0.1 BTC for 0.5 ETH – Taxable event
  4. Sell 0.5 ETH for $200 – Taxable event
In the screenshot below, you can see how the IRS form 8949 is filled in with the above example. Also, you can read our full guide on how to automate you crypto tax calculations and report with a software.
Crypto tax reporting in IRS form 8949 example

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 USD (or your preferred fiat) value of your crypto transaction. You always need your transaction (cost basis and sell price) to be 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 on gain or loss on a transaction. Exchanges can only do this within the crypto exchange. However, once you transfer the coins outside the exchange they loose the data and the ability to give a tax report with enough details.

You need to collect all crypto transaction data into one software.

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.

Read our full list with the best crypto tax software for automated reports.

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