Do You Get Taxed On Cryptocurrency Gains

Offload Crypto Assets To Your Spouse

Coupled up? Depending on the country you pay tax in you might be able to offload some of your crypto assets to your husband or wife or civil partner – tax-free. In the UK for example, transfers between spouses is currently exempt from CGT, under a tax-free gift loophole.

This means that the ownership of assets can be transferred between partners so that both of your annual CGT allowances can be used against gains. This effectively doubles the CGT allowance for married couples and civil partners. As per the HMRC, to use this benefit you can’t be separated or living apart.

The transfer is said to occur at ‘no gain, no loss’ because the recipient inherits the base cost of the asset being transferred.

How To Calculate Gains And Losses

Say you have the following transaction history on Coinbase:

• 1/1/21 Buy 1 BTC for $29,000
• 2/2/21 Buy 1 BTC for $36,000
• 3/3/21 Buy 1 BTC for $50,000
• 4/4/21 Trade 0.5 BTC for 14.5 ETH

With this transaction history, you first trigger a taxable event when you trade 0.5 BTC for 8 ETH. To calculate the gain/loss, you need to subtract your cost basis of 0.5 BTC from the fair market value at the time of the trade.

The question here is, what is your cost basis in the 0.5 BTC that you traded for 8 ETH? After all, you have purchased 3 different bitcoins all at different prices prior to this trade.

To answer this, you have to determine which bitcoin you are disposing of in this scenario.

To determine the order in which you sell various cryptocurrencies, accountants use specific costing methods like First-In First-Out or Last-In First-Out . The standard method is First-in First-out.

Do I Owe Crypto Taxes

In the U.S., crypto is considered a digital asset, and the IRS treats it generally like stocks, bonds, and other capital assets. Like these assets, the money you gain from crypto is taxed at different rates, either as capital gains or as income, depending on how you got your crypto and how long you held on to it.

To understand if you owe taxes, its important to look at how you used your crypto in 2021. Transactions that result in a tax are called taxable events. Those that dont are called non-taxable events. Lets break them down:

Not taxable

Taxable as capital gains

• Selling crypto for cash: Did you sell your crypto for U.S. dollars? Youll owe taxes if you sell your assets for more than you paid for them. If you sell at a loss, you may be able to deduct that loss on your taxes.

• Converting one crypto to another: When you use bitcoin to buy ether, for example, you technically have to sell your bitcoin before you buy a new asset. Because this is a sale, the IRS considers it taxable. Youll owe taxes if you sold your bitcoin for more than you paid for it.

• Spending crypto on goods and services: If you use bitcoin to buy a pizza, for example, youll likely owe taxes on the transaction. To the IRS, spending crypto isnt that much different from selling it. You need to sell the asset before it can be exchanged for a good or service, and selling crypto makes it subject to capital gains taxes.

Taxable as income

Good news for hodlers

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Do You Pay Taxes On Lost Or Stolen Crypto

Typically, you can’t deduct losses for lost or stolen crypto on your return. The IRS states two types of losses exist for capital assets: casualty losses and theft losses. Generally speaking, casualty losses in the crypto world would mean having damage, destruction, or loss of your crypto from an identifiable event that is sudden, unexpected or unusual. As an example, this could include negligently sending your crypto to the wrong wallet or some similar event, though other factors may need to be considered to determine if the loss constitutes a casualty loss. Theft losses would occur when your wallet or an exchange are hacked.

In either case, you cant deduct these losses to offset your gains. Due to tax reform laws going into effect in 2018, most all casualty and theft losses arent deductible between 2018 and 2025. In the future, taxpayers may be able to benefit from this deduction if they itemize their deductions instead of claiming the standard deduction.

How Do Defi Taxes Work

Cryptocurrency lending platforms and other DeFi services like Uniswap, Maker, and Compound have exploded in popularity within the evolving crypto landscape.

Receiving interest income from crypto lending activities or liquidity pools is considered a form of taxable income and must be reported on your taxesâsimilar to mining and staking rewards.

The full tax implications associated with transactions common to the DeFi landscape are outside of the scope of this piece however, we discuss them thoroughly in our blog post here: The Defi Crypto Tax Guide.

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How Much Do I Owe In Crypto Taxes

How much you owe in cryptocurrency taxes depends on your annual income and how long youve held your cryptocurrency.

• If youve owned your coins for less than one year before spending or selling them, any profits would be short-term capital gains, taxed at your normal income tax rate.
• If youve held your crypto for one year or more, any profit would be long-term capital gains, taxed at a lower rate, determined by your annual income.

If you earn cryptocurrency by mining it, or receive it as a promotion or as payment for goods or services, it counts as regular taxable income. You owe tax on the entire value of the crypto on the day you received it, at your regular income tax rate.

In addition, if you hold cryptocurrency from these activities, and either spend or sell them later for more than their value when you first received them, you owe short- or long-term capital gains taxes on the profits, based on how long youve held it.

Use The Annual Gift Tax Exclusion

Based in the States? Consider yourself lucky that crypto gifts to anyone, under $16,000 are tax free, unlike in countries like Australian and the U.K.

Instead, American taxpayers enjoy an annual $16,000 gift tax exclusion, which applies to each person you give a gift to. Gifts valued at more than $16,000 would potentially subject you to gift taxes of 40% – but only if you’re over the lifetime gift tax exemption of $12.06 million. By strategically gifting cryptocurrency, you can avoid paying capital gains tax on the crypto you dispose of.

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Some Crypto Events Are Subjected To Income Taxes:

Cryptocurrency revenue is taxed like regular income at its market price on the day it is received by the taxpayer. The following are some of the most popular examples of crypto income:

• Receiving cryptocurrency as payment for a service
• Earning benefits via mining cryptocurrency
• Earning benefits via staking cryptocurrency
• Receiving interest payments when lending crypto

The treatment of how is cryptocurrency taxed applies to all types of transactions. Even if you spend crypto on everyday items, such as a cup of coffee, the IRS requires you to record the transaction and calculate the capital gain or loss. There are no exceptions for transactions below a certain threshold or types of transactions â at least for now.

Do You Pay Tax When Transferring Crypto

The IRS has confirmed that when you’re moving crypto around between your own wallets – this isn’t seen as a disposal and you don’t need to report it or pay Capital Gains Tax. However, nothing is quite so straightforward in the world of crypto and transactions like adding and removing liquidity may get a little more confusing from a tax perspective.

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Do I Have To Pay Net Investment Income Tax

Some highly-successful crypto investors are required to pay an additional 3.8% tax on their net investment income.

Net investment income is the total amount youâve earned from all your investments â including income from bonds, stocks, mutual funds and crypto. Your net investment income is calculated by adding together capital gains, interest and dividends, and any income from your cryptocurrency investments.

Itâs important to note that the vast majority of crypto investors will likely not be required to pay NIIT. The tax only applies if youâve reached the following thresholds of net investment income.

Using Cryptocurrency To Pay For Goods And Services

A complicating factor for crypto investors arises when they attempt to use their virtual currency to pay for goods and services. The IRS chose to treat cryptocurrency as property in 2014 because most people only saw it as a capital asset at the time. Now, as more companies choose to accept cryptocurrency as a form of payment and people begin to adopt it as a unit of account, many people have begun to see it as a viable alternative currency. However, the current tax treatment of crypto impedes the wholesale replacement of fiat currency.

With traditional fiat currencies, you simply pay for your purchase and have no tax consequences related to cost basis or the value of your currency at the time of payment. However, cryptocurrency users must deal with capital gains and losses in addition to whatever sales taxes they might face at the point of sale.

For example, let’s imagine you bought $10 worth of Bitcoin two years ago and it has since appreciated to $100 in value. If you sold it on an exchange, you’d have $90 of realized long-term capital gains, just like you would with any other capital asset.

If you instead used that same $100 worth of Bitcoin to buy groceries from the supermarket, you’d still have to pay long-term capital gains taxes on the $90 difference between appreciated value and your cost basis.

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Relocate To A State With No Crypto Tax Rules

State-level income taxes have been overlooked in this article until now. Your state, understandably, has a strong interest in your investing profits.

A handful of tax-friendly states, fortunately, have minimal or no income taxes. That means you’ll have to pay federal taxes, but you won’t have much to give to your state’s coffers.

Consider moving to a low or no-income-tax state if you can, as this will decrease or even eliminate taxes on all forms of income. These little sums can mount up, allowing you to keep more of your cryptocurrency profits.

Just Using Crypto Exposes You To Potential Tax Liability

You might think that if you only use but not trade cryptocurrency youre not liable for taxes.

Not true!

Any time you exchange virtual currency for real currency, goods or services, you may create a tax liability. Youll create a liability if the price you realize for your cryptocurrency the value of the good or real currency you receive is greater than your cost basis in the cryptocurrency. So if you get more value than you put into the cryptocurrency, youve got yourself a tax liability.

Of course, you could just as well have a tax loss, if the value of goods, services or real currency is below your cost basis in the cryptocurrency.

In either case, youll have to know your cost basis to make the calculation.

Its important to note that this is not a transaction tax. Its a capital gains tax a tax on the realized change in value of the cryptocurrency. And like stock that you buy and hold, if you dont exchange the cryptocurrency for something else, you havent realized a gain or loss.

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How To Calculate Your Crypto Taxes

Calculating your crypto taxes – especially if you trade at volume – is time consuming. You can do it all manually, or you can use a crypto tax calculator like Koinly to save you hours.

If you want to calculate your crypto taxes manually, follow these steps:

You’ll then need to report all taxable crypto disposals, the proceeds from your disposal and the subsequent capital gain or loss to the IRS , as well as any income from crypto.

It’s enough to exhaust even the most enthusiastic of mathematicians. But there is an alternative – use Koinly and save hours.

Buy Crypto Currency In Your Ira

The easiest way to defer or eliminate tax on your cryptocurrency investments is to buy inside of an IRA, 401-k, defined benefit, or other retirement plans. If you buy cryptocurrency inside of a traditional IRA, you will defer tax on the gains until you begin to take distributions. If you buy within a ROTH, you pay zero tax on the capital gains earned in the account.

To buy cryptocurrency inside of a retirement account, you must move that account outside of the United States and into an offshore IRA LLC. Then that IRA LLC can open an offshore bank account and wallet to make the investment.

Youll be the manager of the IRA LLC and in control of the investments. Youll be in total control of the account and the sole decision-maker.

To get your IRA offshore, you first form the LLC in a zero tax country. Then you move your account from your current custodian to one that allows for offshore investments . Finally you open an international bank or brokerage account and transfer the cash from your retirement plan into that account.

From here, you write the checks or send the wires. You make the investments and can choose cryptocurrency. If you want to invest in foreign real estate, physical gold, or crypto, go for it. You can also use your IRA to get residency in countries like Nicaragua or Panama.

Fyi total annual contributions to your Traditional and Roth IRAs combined cannot exceed: $5,500 $6,500 .

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How To Report Cryptocurrency On Taxes

Filing your cryptocurrency gains and losses works the same way as filing gains and losses from investing in stocks or other forms of property.

There are 5 steps you should follow to file your cryptocurrency taxes:

Letâs walk through each one of these steps in detail.

Do You Have To Pay Taxes On Crypto

The IRS classifies crypto as a type of property, rather than a currency. If you receive Bitcoin as payment, you have to pay taxes on its current value. If you sell a cryptocurrency for a profit, you’re taxed on the difference between your purchase price and the proceeds of the sale.

But exactly how crypto taxes are calculated depends on your specific circumstances. Here’s how it boils down:

• If you acquired a Bitcoin from mining, that value is taxable immediately no need to sell the currency to create a tax liability.

• If you disposed of or used cryptocurrency by cashing it on an exchange or buying goods and services, you will owe taxes if the realized value is greater than the price at which you acquired the crypto. You may have a capital gain thats taxable at either short-term or long-term rates.

Brian Harris, tax attorney at Fogarty Mueller Harris, PLLC in Tampa, Florida, says buying and selling crypto creates some of the same tax consequences as more traditional assets, such as real estate or stock.

“The value … goes up and down, and then if you sell or exchange that property then you have capital gain or loss, depending on how that value has moved,” Harris says.

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Do I Have To Pay Crypto Taxes

Yes, if you traded in a taxable account or you earned income for activities such as staking or mining. According to IRS Notice 2014-21, the IRS considers cryptocurrencies as property, and are given the same treatment as stocks, bonds or gold. If you sold crypto you likely need to file crypto taxes, also known as capital gains or losses. Youll report these on Schedule D and Form 8949 if necessary. Separately, if you made money as a freelancer, independent contractor or gig worker and were paid with cryptocurrency or for crypto-related activities, then you might be self-employed and need to file Schedule C.

If you only bought but didnt sell crypto during the year, electing to hold it in a wallet or on a crypto platform, you wont owe any taxes on the purchase. Much like you wouldnt owe taxes for buying and holding stocks for your portfolio.

The tax consequence comes from disposing of it, either through trading it on an exchange or spending it as currency. Thats right, when you make purchases using crypto, this counts as a taxable event youll need to report on your tax forms just like selling a stock and using the resulting money to buy something.

Youll need to keep track of all these transactions so you can determine your tax liability accurately on your tax return.

How To Figure Out Cost Basis For Crypto Capital Gains: Fifo Lifo Hifo And Specific Id

When you sell or dispose of crypto, its not always obvious which coin was used. So how can you tell how much you initially paid for it?

You can use a cryptocurrency tax accounting software to pull in your transaction history and automatically determine your cost basis, sales proceeds, and holding period. Depending on the software you choose, multiple accounting methods may be offered.

The IRS guidance generally advises taxpayers to use FIFO. FIFO means crypto is sold in the same order you bought it.

Specific ID can also be used in some cases. This allows you to lower capital gains by identifying the specific coin that was used in a transaction, but it requires special accounting . NFTs, by nature, require specific ID accounting.

It is possible to use specific ID for some transactions while using FIFO for everything else.

You may have also heard of LIFO or HIFO . Even though these accounting methods may be offered in your crypto tax software, the IRS is unlikely to support LIFO or HIFO unless you have enough documentation to specifically ID your coins.

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