Sunday, March 17, 2024

Do You Pay Taxes On Crypto Gains

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If You Exchange One Type Of Cryptocurrency For Another

How to Pay Zero Tax on Crypto (Legally)

Cryptocurrency enthusiasts often exchange or trade one type of cryptocurrency for another. For example, say you have $1,000 worth of Litecoin and exchange it for $1,000 worth of Ethereum. If you originally paid $300 for the Litecoin, you have to recognize a $700 capital gain when you make the exchange. You established a $300 basis at the time of purchase for your original Litecoin position but recognized a $700 capital gain as a result of the coins appreciation between your purchase and the exchange for Ethereum. Your Ethereums basis is its fair market value at the time of exchange, making your new cost basis $1,000 after paying the $700 capital gain on the exchange.

It’s important to note that all of these transactions are referenced back to United States dollars since this is the currency that is used for your tax return. So, even if you buy one cryptocurrency using another one without first converting to US dollars, you still have a taxable transaction.

Adding And Removing Liquidity

If you’re adding or removing liquidity from various DeFi protocols, on the surface, this doesn’t look like a taxable event. You’re not disposing of your crypto and these transactions are more akin to a transfer.

However, if you receive a token in exchange for your share in the liquidity pool, this could be viewed as a crypto-to-crypto trade and subject to Capital Gains Tax. Each DeFi protocol works slightly differently – your best bet here is to speak to an experienced crypto accountant to ensure you remain tax compliant.

What Can You Deduct From Taxable Gains

  • Transaction fees The fees you pay to buy or sell crypto on an exchange.
  • Advertising costs If you promote your crypto business with online ads, these costs can be deducted from your taxable gains.
  • Contract fees Any professional fees you incur in relation to your crypto trading activities, such as legal or accounting fees.
  • Valuation costs If you need to have your crypto assets valued for tax purposes, these costs can be deducted.

Read Also: How Much Do I Need To Make To Pay Taxes

Receiving A Crypto Gift

The good news keeps on coming because whoever you gift your crypto to also doesn’t need to pay tax on receipt of the gift. The recipient will inherit the cost basis of the crypto when they’re given the gift, so if you’re sending a gift, make sure to send this information over to them too. If you don’t have this information yourself, then their cost basis will be the fair market value of the gift on the day they receive it.

Top Questions About Paying Taxes On Crypto

Do You Pay Income Tax On Bitcoin : How Is Cryptocurrency Taxed Forbes ...

Crypto investors can make a lot of money buying and holding onto virtual currencies. However, not knowing tax laws can hurt your returns. In addition, having less money than anticipated can strain your retirement plans or create pressure on your monthly budget.

When you know the rules, you also discover the best ways to lower your tax bill. You may feel inspired to set up a crypto IRA, make donations via Bitcoin, and use other strategies to protect your gains. Crypto is a new and promising asset. Taxes arent new, but they are as complicated as ever. Mix the two together, and its no wonder many people have questions. We have highlighted some frequently asked questions about crypto taxes.

Also Check: How To File State Taxes By Mail

How Are Crypto Gifts Taxed

If you are feeling generous, you can send a cryptocurrency gift to a friend or family member without having to worry about paying additional taxes.

Generally, cryptocurrency gifts are tax-free for all but the most generous gift-givers. Gift taxes are not imposed until the gift-giver has gifted away over $11.7 million dollars in their lifetime. Even then, the gift recipient will never have to pay taxes for merely receiving the gift.

However, if you send a gift or gifts with a fair market value above $15,000 to any individual in a year, you will need to file a gift tax return in addition to your traditional tax returns. This form is for informational purposes and does not mean you will be required to pay taxes on your gift.

For more information, check out our guide to crypto gift taxes.

How To Calculate Cryptocurrency Gains For Your Us Taxes While Living Abroad

Lets face it cryptocurrency can be confusing. Its part cash, part investment, meaning you can use it to pay for goods and services, and it can grow in value over time. Because of this, American expats need to understand how to calculate cryptocurrency gains when it comes to their U.S. taxes.

Say you purchase $20 worth of cryptocurrency, and six months later, the amount youve purchased is now worth $50. If you choose to sell those holdings or use them to make a purchase, your short-term capital gains would be $30. This is the portion that gets taxed, not the amount you spent on the crypto in the first place .

Now, say you purchase $20 worth of crypto and choose to sell it two years later, when the fair market value is $800. The long-term capital gains would be $780 but taxed according to the graduated scale for long-term capital gains.

That being said, buying and selling isnt the only way expats approach this digital currency. In some cases, you may choose to trade one cryptocurrency for another. Suppose you originally purchased $200 worth of one cryptocurrency, now valued at $1,000. If you choose to trade it for another cryptocurrency, your capital gains would be $800. How long you held the initial crypto you bought before trading it for another would determine whether short-term or long-term capital gains tax is applied.

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What You Have To Report On Your Tax Return

The IRS considers cryptocurrenciesand there are many, not just Bitcoinas a type of virtual currency. However, it taxes these virtual currencies as property. In general, you want to remember that:

  • You may need to report your gains if you sold a cryptocurrency, exchanged cryptocurrencies or used cryptocurrency to purchase goods or services.
  • You can deduct your losses if you sold or spent cryptocurrency that lost value.
  • You can take a charitable contribution deduction if you donate your cryptocurrency to an eligible nonprofit.
  • The Form 1040 now asks whether you’ve received, sold, sent, exchanged or otherwise acquired a virtual currency. However, you don’t need to answer yes if the only transactions were purchases of virtual currency with real currency.

To determine how much you’ll need to report in gains or losses, you first need to know the value of the cryptocurrency in U.S. dollars when you first bought or acquired it. The value, inclusive of any fees you paid, is known as your cost basis. You’ll compare this to the price when you sell or spend it to figure out your tax liability.

For example, if you bought a Bitcoin for $10,000 after fees and sold it for $15,000, you had $5,000 in gainsthat’s what you’ll pay taxes on. These gains will be reported on Form 8949 and summarized on Schedule D in your tax return.

The IRS offers further clarification on virtual currencies in an FAQ that it periodically updates.

The Irs Is Serious About Collecting Taxes On Your Crypto

Crypto Tax Strategy | How To Save $$$ on Crypto Gains

But even if its not reported directly to the IRS by a cryptocurrency exchange, your crypto transactions are taxable. If you dont report and pay taxes on cryptocurrency that you sell, you could face penalties and consequences.

You wont get any 1099 forms from transactions in a personal cryptocurrency wallet on a cryptocurrency exchange.

In most cases of tax evasion, remedying the situation only requires you to pay taxes, interest, and penaltieswhich can be sizable. Anyone convicted of tax evasion is subject to up to $250,000 in fines and five years in prison. Filing a false tax return is subject to a $250,000 fine and three years in prison.

Remember, just like other investment assets, you can use cryptocurrency losses to offset gains. If youre struggling to pay taxes on your cryptocurrency gains, then consider paying for cryptocurrency tax software to help you track your crypto and prepare your tax return. You can also hire a tax professional who is well-versed in cryptocurrency to guide you through the process.

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Situations When Youll Need To Pay Taxes On Crypto

Cryptocurrency is sold for cash: When an investor sells cryptocurrency for government-backed currency and makes a profit, the investor will have to pay capital gains taxes on the windfall just as they would on a share of stock.

Cryptocurrency is used to purchase a good or service: If an individual uses their cryptocurrency to buy a new car or pay for a haircut, they will likely owe capital gains taxes on the purchase. To the IRS, using crypto to buy something is like selling it for cash because the crypto needs to be sold for dollars before it can be used to exchange for a good or service.

Exchanging cryptocurrencies: When converting or exchanging one crypto for another, it is comparable to selling the one to purchase the other. As a result, the investor may have to pay capital gains tax on the sale of the first crypto if it was sold for a profit.

Being paid in cryptocurrency: If an individual decides to be paid in cryptocurrency, they will need to pay income taxes on the crypto income depending on their tax bracket just as they would if being paid in dollars.

Mining cryptocurrency: The proceeds from mining Bitcoin and other cryptocurrencies are typically taxed as income. Its also possible for the proceeds of some miners to be taxed as business income.

Crypto is acquired via an airdrop or hard fork: In the event of a crypto airdrop or hard fork that results in new coins, those new coins are taxed as income.

Reporting Crypto Gains & Losses On Tax Returns

When it comes to reporting your profits and losses from your cryptocurrency investments, it might be best to go through a qualified tax professional.

In doing so, you can be sure that you are repotting the correct figures. This is especially the case if you are an active trader that has placed many buy and sell positions throughout the tax year.

Also Check: What Is The Penalty For Filing Your Taxes Late

Crypto Tax Calculation Example

Suppose your annual income is $55,000 and you file your taxes as single. On August 1st, you purchased $500 of BTC and sold it a year later, on July 1st for $1,500. Your gain of $1,000 will qualify for short-term capital gains at the rate of 25%, resulting in 0.25 *$1,000 = $250

Sale price of assets – Cost of acquiring assets = Short-term gains

Sale price = $1,500

Cost of acquiring assets = $500

$1,500 – $500 = $1,000

This gain of $1,000 is a short-term gain as the assets were sold within a period of 11 months.

Annual income = $55,000, and the short-term capital gains tax rate for this income is 25%.

So, tax owed = 25% * Capital gains = 0.25 * $1,000 = $250

Another example is your annual income is $35,000 and you bought $500 of BTC on August 1, 2020. If you sell it at $1,500 on August 2, 2021, you incurred a long-term capital gain of $1,000. According to the rates tabulated above, youâll have to pay 0% taxes. Thus, no federal taxes will apply.

Sale price of assets – Cost of acquiring assets = Long-term gains

The sale price = $1,500

The cost of acquiring assets = $500

$1,500 – $500 = $1,000

This gain of $1,000 is a long-term gain as the assets are sold after a period of 1 year.

Annual income = $35,000, and the long-term capital gains tax rate for this income is 0%.

Buying Crypto With Usd

Tax On Crypto Trading Uk

You’re not taxed when you buy crypto with fiat currency – like USD – in the US.

However, it’s really important you keep records of your crypto transactions. This is so you can keep a detailed account of your cost base, so you can later calculate your crypto capital gains and losses accurately when you later dispose of crypto assets.

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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.

Can The Mas Track Crypto

The Monetary Authority of Singapore is delegated under the Payment Services Act to be responsible for allegations of money laundering within the nations financial institutions. For this reason, licensed cryptocurrency exchanges that are compliant with the anti-money laundering regulation can have crypto transactions within the exchange and to other compliant exchanges monitored. The Huobi Singapore exchange, for example, only permits deposits and transfers to other AML compliant addresses and this is so that they can track all transactions. This is all under the MAS AML regulation, which implies that the institution can track crypto transactions.

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How Is Cryptocurrency Taxed

The IRS considers cryptocurrency as property for tax purposes. That means the tax rate is anywhere between 0% to 37% depending on your income tax bracket, how you acquired your crypto and how long you held it.

Cryptocurrency falls into three tax categories:

  • Ordinary income
  • Short-term capital gains
  • Long-term capital gains
  • Crypto taxed as ordinary income only requires reporting what youve earned. On the other hand, youll need to put in a bit more legwork to calculate your capital gains and losses from your crypto activity. Once you have these numbers, your annual income determines which tax bracket youll fall into.

    Cryptocurrency as ordinary income

    $156,355 plus 37% of the amount over $523,600

    Can I Reduce My Income And Get To A Lower Tax Bracket

    How to pay ZERO TAXES on your Crypto Gains 2021 – Step By Step

    Itemized deductions can reduce your tax bill for the year.

    If you have $40,000 of income for the year and claim $16,000 worth of itemized deductions, your taxable income will fall to $24,000. In some cases, deductions can reduce your taxable income to the point where you may fall into a lower marginal tax bracket.

    Examples of itemized deductions include amounts paid for cryptocurrency donations, mortgage interest, and state/local tax paid.

    Remember, itemized deductions will only reduce your tax bill if their sum is greater than the standard deduction available to you. â

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    Fill Out The Proper Tax Forms

    Once you have a record of your crypto transactions, youll need to fill out certain tax forms depending on how you used your crypto:

    • Form 8949. This form logs every purchase or sale of crypto as an investment. This should include the total number of coins, the date and price you bought, the date and price you sold and your gain or loss for each transaction.
    • Schedule D. This form summarizes your total capital gains and capital losses from all investments, including crypto.
    • Schedule C. If you received coins from mining, you need to disclose whether you received them as a business or as a hobby. If youre running a crypto mining business, you may owe self-employment taxes if your income exceeded your expenses for the year.
    • Schedule 1. If you report your crypto mining as a hobby, youd report this income on Line 8 of Schedule 1. You wont owe self-employment tax, but you become more limited on what you can deduct as an expense.

    Keep It Until You Die

    Use your cryptocurrency as a tool for building generational wealth if you dont need to access the money you invested in it. For this to work, you must believe in the long-term potential of a cryptocurrency, but it may provide exceptional tax benefits.

    When you pass away, your assets are given to your heirs on what is referred to as a step-up basis. Consider purchasing $1,000 worth of bitcoin today, which will be worth $250,000 when you pass away in 20 years. You would be liable to pay taxes on a $249,000 gain if you sold the bitcoin just before passing away.

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    Invest In An Opportunity

    US investors can defer a chunk of their crypto tax bill by investing in an Opportunity-Zone fund. A provision in the 2017 tax law allows taxpayers to defer, and even reduce, capital gains taxes if they put the proceeds from the sale of say, a stock or business, into a fund created to promote investment in an economically disadvantaged area. Investors generally have six months to move the money. Under the rule, you’ll also be able to defer your capital gains tax until 2026, and if you hold the investment beyond that, shrink your tax bill by as much as 10%.

    In a similar vein, in the United Kingdom any gains made on investments in an Enterprise Investment Scheme and Social Investment Tax Relief are free from CGT if held for three or more years.

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