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Is Converting Crypto To Stablecoins Taxable
Selling any crypto to a stablecoin is a taxable event in the US. Any crypto-to-crypto or crypto-to-FIAT trade is a taxable event in the US. Even though youre not converting into FIAT , you must account for the capital gains in these trades and make sure you have enough funds to pay taxes on them.
When you convert a cryptocurrency to stablecoins like USDT, the gains are calculated the same as if you were trading Bitcoin for USD.
Your cost basis on the trade was the purchase price you paid when you acquired Bitcoin, and the sales proceeds are the total amount you receive in USDT when selling your BTC. The difference between the two is the capital gains youll have to pay taxes on. The tax rate will depend on your holding period and other factors.
Long-term holding offers tax benefits in the US and many other countries.
How To Pay Taxes On Nfts
Non-fungible token s are digital assets, like art, exchanged via blockchain technology. The tax rules around NFTs aren’t clear, since there is no clear guidance from the IRS on if NFTs should be taxed as “collectibles” which are taxed differently from cryptocurrency and stocks as some tax experts say they should be.
The general consensus seems to be that investors who buy these digital assets using cryptocurrency need to pay capital-gains tax when they sell, and that NFT creators who make money selling the assets should report that money as ordinary income.
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When Is Cryptocurrency Taxed
Cryptocurrencies on their own are not taxableyou’re not expected to pay taxes for holding one. The IRS treats cryptocurrencies as property for tax purposes, which means:
- You pay taxes on cryptocurrency if you sell or use your crypto in a transaction. This is because you trigger capital gains or losses if its market value has changed.
- If you receive crypto as payment for business purposes, it is taxed as business income.
How To Minimize Crypto Taxes
Now that you know a bit more about crypto taxes, which is really just another way of saying capital gains taxes, you will want a set of strategies to minimize how much you pay to the IRS. Here are some useful tips to reduce your tax bill.
1. Hold Until Your Short-Term Gains Turn Into Long-Term Gains
As just noted, different capital gains rates will apply depending on how long you own cryptocurrency. If you want to lower your tax bill, hold your cryptocurrency long enough to turn your short-term gains into long-term gains. It may not be an easy task, but if you have the patience and fortitude to keep your crypto for at least a year before selling, then you’ll likely pay a reduced tax rate on any capital gain.
Heres an example: Mary, a single taxpayer, earns $70,000 in wages for 2022. She also has $5,000 in capital gains from the sale of cryptocurrency. If the gain is short-term gain, she’ll have $75,000 of ordinary income. After claiming the standard deduction, that leaves her with $62,050 of taxable income, which puts her in the 22% tax bracket and results in a tax bill of $9,268. However, if the gain is long-term gain, the $70,000 of ordinary income, minus the standard deduction, is still taxed in the 22% bracket, but the $5,000 of capital gain income is only taxed at 15%. That means an overall tax of $8,918 and a savings of $350.
2. Offset Capital Gains with Capital Losses
3. Sell In a Low-Income Year
4. Reduce Your Taxable Income
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How Do Digital Assets Get Taxed
In most cases digital assets get taxed as capital gains. A capital gain is a difference between what was paid for an asset and what it was sold for. A capital loss can also happen if the selling price is less than the purchase price. Capital losses can offset capital gains.
Short-Term Capital Gains
When investors sell a digital asset within a year of buying it, the profit is a short-term capital gain. A short-term gain gets taxed at the ordinary-income tax bracket. Theyll pay the same tax rate as they pay on their employment income unless the gains increase income and push them into the next tax bracket.
Long-Term Capital Gains
If investors wait a year or longer to sell, the gains are long-term. In the U.S., long-term capital gains qualify for special tax rates.
- If one makes less than $40,400 for total adjusted gross income in 2021, one doesnt pay taxes on long-term capital gains.
- If one makes more than $40,400, up to $445,850, they pay 15% on long-term capital gains.
- If income is higher, investors pay a crypto rate of 20%.
The reporting of crypto capital gains and losses is required using IRS Form 8949. The IRS also provides a worksheet to help calculate total capital gains and losses. Check the current years Instructions for Schedule D section of the tax return for details.
How Cryptocurrency Taxes Work
One of the most important things investors need to know before investing in cryptocurrency is how crypto taxes work. Additionally, investors should be aware that classification of cryptocurrencies varies depending on the federal government agency overseeing the investment activity.
The IRS issued guidance in 2014 to help individuals and businesses determine how the government treats cryptocurrency taxes. This notice defined cryptocurrencies as virtual currencies . Despite this name, the IRS stated that cryptocurrencies are not currency for federal tax purposes. Instead, transactions of cryptocurrencies are treated as property, like stocks, bonds, and other capital assets. So, when someone uses, sells, or is paid in a cryptocurrency, they are generally required to pay taxes on it.
Though the IRS treats cryptocurrencies as property for tax purposes, this categorization is not consistent across all federal government agencies.
The Commodity Futures Trading Commission , for example, classifies cryptocurrencies as a commodity when regulating a variety of crypto-related trading markets. According to the CFTC , it oversees cryptocurrencies when they are used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce. In contrast, the U.S. Securities and Exchange Commission can regulate cryptocurrencies as a security and investors can be subject to securities laws.
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Purchasing Crypto With Dollars
Simply buying virtual currency with U.S. dollars and keeping it within the exchange where you made the purchase or transferring it to your personal wallet does not mean youll owe taxes on it at the end of the year.
If your only crypto-related activity this year was purchasing a virtual currency with U.S. dollars, you dont have to report that to the IRS, based on guidance listed on your Form 1040 tax return.
Frequently Asked Crypto Tax Questions
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How is crypto tax calculated?
Each time a crypto asset is acquired, mined or received for a profit, the gains automatically qualify as capital gains. According to the IRS, crypto assets are treated as property and hence, are taxable. So your capital gains will also be taxed accordingly and are known as capital gains tax. Capital gains can be calculated using the formula:Fair market value – Cost basis – Fees = Capital gains The rate of tax will depend on the income and holding period of the assets.
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How do you avoid taxes on crypto?
There is no way that you can avoid paying crypto taxes to the IRS. However, you can minimize your tax obligations in a few ways. If your losses outweigh your gains, you can offset $3,000 of income, as well as take advantage of the lack of wash sale rule using tax-loss harvesting.Aside from that, you can also consider buying crypto via an IRA . Or, if youâre feeling generous, you can also donate your assets to a tax-exemption organization or gift up to $15,000 worth of crypto assets to your friends and family to avoid crypto taxes.
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How much taxes do you pay on crypto profit?
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Do you need to report crypto gains?
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Is crypto tax software safe?
Crypto tax software helps you by tracking, managing, and calculating the gains or losses on your crypto transactions. Your funds are not accessible through crypto tax software, they are read-only, so this keeps your assets safe from hacks or theft.
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How can ZenLedger help?
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What Is Crypto Day Trading
Just like stock day trading where a stock or a security is bought and sold within a single trading day, crypto day trading is the practice of buying and selling cryptocurrencies within a single trading day. It is also called âintraday trading.â Day traders function on events that stir up short-term market moves and one of the popular techniques is news-based trading which includes economic statistics, corporate earnings, and more. Technical analysis is another popular day trading method.
Intraday trading can be a lucrative career but for that, you need well-planned strategies and a ton of experience. This doesnât mean that novices canât get started with crypto day trading, they can choose a strategy that suits them best and start small. It is important to remember that even the most seasoned traders can slip up and book losses. They can even miscalculate their day trading crypto taxes as they have hundreds and sometimes thousands of transactions and one might slip through the cracks. A crypto tax software like ZenLedger can help prevent these miscalculations and slip ups.
However, before starting a career in crypto day trading there are a couple of market conditions that you should know about:
Important:Crypto mining can also affect the market as miners sell most of the coins they mined. This can sometimes increase the selling pressure.
Before we dive into the strategies, letâs try and understand crypto day trading and taxes
How To Report Cryptocurrency On Taxes
You need to report your cryptocurrency gains on your tax return alongside your crypto income.
For your crypto capital gains, you’ll need to fill out Form 8949 and Schedule D of your Form 1040.
For your crypto income, it will depend on the nature of the transaction. For example, crypto interest should be reported on Schedule B and miscellaneous crypto income on Schedule 1 of your income tax return.
Learn more about crypto tax reporting and what tax forms you need.
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How Are Cryptocurrency Soft Forks Taxed
Sometimes, a cryptocurrency will need to rebrand or change its architecture for increased functionality. When this happens, the conversion from the old version of the token to the new version of the token is likely not a taxable event. Similar to a stock split or a company changing tickers on the stock market, the underlying cost basis will carry through into the new asset without triggering a taxable event.
Generally, if you havenât received any new cryptocurrency as a result of a fork, there is no taxable event.
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.
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Do I Have To Pay Taxes When Converting From Stablecoins To Usd
Any crypto-to-crypto or crypto-to-FIAT is a taxable event in the US. We know that many stablecoins are pegged to the US dollar, making the conversion from USDT to USD at an almost 1:1 basis. However, this is not necessarily true. There could be very slight differences in the conversion, causing you to have a very small capital gain or loss when converting USDT to USD. This issue happens because the conversion rate of 1 USD may be 1.01 USDT or 0.99 USDT, causing discrepancies and small gains/losses.
Since you must report any crypto-to-crypto or crypto-to-FIAT trade, youll have to calculate the gain/loss on these trades and report it on your tax return.
These capital gains are very difficult to calculate without the help of crypto tax software. We encourage you to check how CoinTracking can import all these trades and automatically calculate your capital gains from stablecoins trades.
Using Crypto For Goods Or Services
When you exchange cryptocurrency for goods or services, you are taxed on the increase in value that cryptocurrency has from the time of purchase until the time it is exchanged. For example, if you bought a Tesla with $100,000 worth of Bitcoin, you would need to track when that $100,000 in Bitcoin was purchased, and you would then pay tax on the increase. If that Bitcoin were purchased at a value of $40,000, then there would be a gain of $60,000 when that Bitcoin is then exchanged for the Tesla. If held for over a year, it will be a long-term capital gain and will be at preferred rates. If the Bitcoin was held a year or less, the $60,000 gain will be taxed at short-term capital-gains rates.
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What Is Cost Basis
Cost basis represents how much money you put into purchasing your property . Cost basis includes purchase price plus all other costs associated with purchasing your cryptocurrency .
From our examples above, itʼs easy to see this formula in action. If you buy 1 Litecoin for $250, your cost basis is $250 per Litecoin. If you sell or trade it when itʼs worth $400, your gross proceeds are $400.
Applying the formula:
Now, letʼs dive into a more complex example to see how you would calculate your gains and losses using this same formula when you have several transactions instead of just one or two.
Trading Crypto Heres What You Need To Know At Tax Time
While digital assets pose some murky tax questions, there are key steps that investors can take to minimize problems with the IRS.
Taxpayers who trade cryptocurrencies or other digital assets had a wild ride last year, and that doesnt stop when it comes to tax time.
Cryptocurrencies like Bitcoin and Ethereum see-sawed wildly in 2021 as many investors moved in and out of the currencies, effectively day-trading them. Now the IRS expects gains, losses and income to be reported on individuals 2021 tax returns and is flexing its enforcement muscle to collect its due.
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Do You Pay Cryptocurrency Taxes A Complete Guide On Crypto Tax With The Help Of Official Irs Tax Guidelines
The answer to the question- Do you pay cryptocurrency taxes, in a single word would be yes! But, the reality is way more complicated than just a simple yes or no.
It has been more than a decade that cryptocurrency has come into existence, but the matter itself and its taxation is ambiguous for many.
In this article, we will untangle all the troubles that one might encounter when filing cryptocurrency taxes.
Official IRS Tax Guidelines
The Internal Revenue Service had released an official notice in 2014, where it stated that cryptocurrency would be treated as property, as compared to real estate, and would not be categorized as currency. The IRS was very particular about the taxation of crypto gains arising out of cryptocurrency transactions and holding and stated that these capital gains and losses must be reported to the IRS, by filing respective documents.
Heres a summary of the Notice 2014-21 of the IRS
Taxable & Non-Taxable Events
Here we have categorized crypto activities into taxable events and non-taxable events. This will be important to you when you are recording your transactions for taxes.
Taxable Events
- Selling mined crypto to a third party
- Selling bought crypto to a third party
- Selling crypto in exchange for fiat currency like US Dollar, Euro, Yen, etc
- Buying goods and services using mined Bitcoin
- Trading crypto for another crypto
- Receiving crypto from airdrops after a hard fork
Non-Taxable Events
How Is Crypto Tax Calculated?
FAQs
