How To Claim Crypto On Taxes

Businesses That Accept Cryptocurrency As Payment For Goods And Services Need To Understand And Follow Irs Rules Learn More Here

What you’ll learn:

As cryptocurrency continues to gain momentum around the world, more small business owners across the United States have begun to accept it from their customers as a means of payment for goods and services. Some even use it to pay their own business expenses. If your small business has started accepting, or is considering taking, Bitcoin, Dogecoin, or any other form of cryptocurrency as payment, it is important to understand the potential business and tax implications that come with the receipt of this type of income.

Can The Irs Track Crypto

Yes – the IRS can track crypto. So if you’re asking yourself do you have to pay taxes on crypto gains? Does the IRS know about my crypto investments? Stop right there.

Here’s how the IRS knows about your crypto:

• All major crypto exchanges must now complete KYC checks.
• Exchanges process banking information where they accept fiat payments in exchange for crypto.
• Many exchanges also have records of crypto addresses you’ve withdrawn funds to – so they can identify custodial wallets too.
• Many exchanges are sending 1099 forms to the IRS and users.
• The IRS has won cases against Coinbase, Kraken and Poloniex, forcing them to share customer data.

You can learn more about 1099 forms, Coinbase and the IRS, John Doe Summons and how the IRS tracks crypto in our blog.

Crypto Profits Are Treated As Capital Gains Income

If you have ever turned a profit and paid taxes on traditional capital assets like stocks or bonds, some of the tax issues associated with crypto will seem familiar and that is because the IRS treats cryptocurrency as property. So, how to report crypto transactions to the IRS? If you make money on crypto, you will pay capital gains taxes in a way that is similar to paying taxes on gains from stocks or bonds.

Take the assets selling price and subtract the cost basis: The difference represents the amount of profit you made from trading a particular cryptocurrency. From there, your cryptocurrency tax liability will depend on whether you held the coin for less than a year or more than a year.

If the holding period was less than a year, you pay the short-term capital gains tax, which can range from 10% to 37% in the United States, depending on the tax bracket you happen to be in. If you held the position for more than a year, you are subject to the more favorable long-term capital gains tax. The long-term rate can be 0%, 15% or 20%, depending on your tax bracket.

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Can You Legally Avoid Taxes On Cryptocurrency

One shouldnt avoid taxes on cryptocurrency transactions. You need to understand that you are not taxed when you buy crypto with fiat cash in the United Kingdom, such as the Great British pound. However, you must keep track of your crypto transactions to keep track of your cost base in detail. This ensures that you can calculate your crypto earnings and losses accurately in the future.

If you purchase and sell crypto on a regular basis or as part of a business that trades in crypto, your trading earnings will be subject to income tax rather than capital gains tax once losses are deducted. If you still want to know how to pay zero tax on cryptocurrency gains? Give crypto as a charity or gift to your relatives.

If you itemize your deductions, you may be able to deduct donations to a qualified charity. Before giving an asset, however, you must have owned it for at least one year. Furthermore, giving cryptocurrencies as a gift could help you avoid paying taxes on your gains. There will be no gift tax for the beneficiary too.

What If I Transferred My Crypto To A Wallet

The transfer of crypto to your wallet, whether a hot or cold wallet, is not a taxable transaction. Careful some tax reports assume that transfers out are taxable as they do not know you are transferring crypto to yourself. Be careful and dont use an exchange tax report without verifying its accuracy by connecting to ACCOINTING.com.

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What If I Have Made A Loss

Individuals in the business of trading cryptocurrency can deduct losses when computing income from a business. Losses that occur as a result of theft are likely deductible if they can be considered an inherent risk in carrying on the business and if the loss is reasonably incidental to the normal income-earning activities of the business.

The Best Crypto Tax Software: Cointracking

The best crypto tax software in the market is CoinTracking.

You can import your trades using CSV or API, track your gains/losses, and generate tax reports according to your preferred accounting method.

CoinTracking is your full crypto tax solution for:

• 25+ advanced reports, including which coins offer you a tax-free rate.

• Automatic capital Gains, according to 12 accounting methods , accepted worldwide.

• Generating complete Tax Reports in your country.

Moreover, CoinTracking can easily classify all your earnings from yield farming, liquidity pools, crypto staking, and much more.

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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

How Are Liquidity Pool Tokens Taxed

While the IRS has yet to issue any guidance specifically on liquidity pool transactions, we can infer the answer by looking at each transaction.

• When you exchange a coin, token or pair for a liquidity pool token this is a taxable event. Your gain or loss is based on the gain or loss in the coins or tokens given up for the LP token. Your tax basis is the original cost of those coins and the proceeds are based on the fair market value of the LP tokens acquired.
• The rewards are taxable upon control based on the value of the coins, the same as mining, staking or any other type of income.
• When you trade the LP tokens back for the original tokens, this is also another taxable event similar to the first transaction. You must report your gain or loss based on the tax basis of the LP tokens relative to the fair market value of the coins or tokens received back when you make the trade.

An argument can be made that this is more of a deposit, as the taxpayer expects to receive his original coins back. But sustaining impermanent losses, the opportunity cost of investing in a liquidity pool due to changes in asset prices, is nearly 100% certain. While impermanent losses are not tax deductible, they do demonstrate that the taxpayer does not retain control of his original coins, which could make a further case for these transactions being taxable.

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If I Donate Crypto To A Charity Is This Deductible

Yes, but it must adhere to the IRS requirements for a donation of property. If you have held the crypto for more than one year before gifting it to a charity, your donation is the fair market value of the donated crypto at the time of the donation and you would not recognize any gain or loss and donation. Yes, you would get the tax benefit at the appreciated value while not having to recognize the loss a great tax strategy if you are sitting on a lot of appreciated crypto and want to help the world. Please be aware of the requirements by the IRS on donations of property.

How Do I Enter Crypto In Turbotax

You can download your capital gains data from CoinTracking and import it on TurboTax to file your crypto taxes. Heres how:

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Does Paypal 2021 Get A 1099

Under a provision in the American Rescue Plan Act of 2021, also known as the COVID-19 Stimulus Package, individuals and businesses on certain online platforms who process more than $600 will now receive a 1099-K regardless of how many individual transactions or payments are processed during the calendar year…. see more

How Is Cryptocurrency Mining Treated By The Cra

Mining cryptocurrency involves solving complex computer problems in exchange for an award of cryptocurrency. This type of computer problem requires high processing power, often resulting in high electricity costs. The CRA has suggested personal mining may be treated as a non-taxable hobby or personal activity, whereas mining for commercial or business purposes should be reported as income. The electricity costs reasonably attributable to the cryptocurrency business may be deducted as business income.

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What If You Dont Receive A 1099 From Your Crypto Exchange

All brokers and some crypto exchanges provide detailed information on your trades each year on a Form 1099. The tax form typically provides all the information you need to fill out Form 8949. However, many crypto exchanges dont provide a 1099, leaving you with work to do.

Most crypto exchanges dont do 1099 reporting, and theyre not yet required to, Harris says. He notes, however, that laws are already in place that require crypto exchanges to report trades in tax year 2023 for filing in 2024. Until then, its up to traders to figure their tax liability.

Without that reporting, its quite a bit more difficult for traders to figure their potential gains and losses.

Its going to be up to you to establish your holding period, your cost basis and your proceeds, Harris says.

That means digging through the records of your transactions, noting the purchase and sale dates, proceeds and anything else required on Form 8949. Thats no ones idea of a fun Saturday afternoon, but it can become even more complex due to whats called ordering rules.

Ordering rules govern which tax lots are sold when, meaning they determine whether a given sale is a short- or long-term investment.

For example, imagine you purchased 100 bitcoins in January, 100 in February and then another 100 in December. Then in March of the following year you sold just 250 of them for a profit. Youll have both a short-term gain and a long-term gain . But how do you split the tax between short- and long-term?

Do I Have To Convert Cryptocurrency Into Dollars Immediately

The short answer to this question is its a good idea. When a business accepts cryptocurrency as payment for goods and services, the transaction must immediately be recorded as income using the fair market value of the cryptocurrency on the date of receipt. Technically, you are not obligated to exchange or convert the cryptocurrency into U.S. dollars immediately. However, if you do not do so, you could find yourself having to pay both income taxes as well as reporting and having to pay taxes on capital gains when the currency is ultimately converted into dollars or used to pay for business expenses.

Keep in mind that there can be variations in the way different cryptocurrency exchange services value transactions. It is important for business owners to be consistent with the exchange used to reduce the likelihood that the IRS will question your approach.

It is also important to understand that cryptocurrency transactions happen almost immediately and are irreversible. So, if your business takes cryptocurrency payments, the sale is final and cannot be reversed. If your customer pays you too much using cryptocurrency, or if you inadvertently charge them too much and dont realize it until after they have paid, there is not a simple way to provide a refund or to make change. Ultimately, you could make a payment to the customer using cryptocurrency although doing so might create a taxable event for your customer.

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What Is The Tax Rate For Crypto

The United States distinguishes between two main types of incomeordinary income and capital gain income. Capital gain income can be long-term or short-term. If youre receiving crypto as payment for goods or services or through an airdrop, the amount you received will be taxed at ordinary tax rates.

If youre disposing of your crypto, the net gain or loss amount will be capital gains.

How Do I Avoid Crypto Taxes

You probably cannot totally avoid crypto taxes, but you can legally reduce your crypto taxes by:

• Holding crypto in the long-term

• Donating crypto to a charitable organization

• Applying the wash sale rule for crypto

• Using crypto losses to offset gains by doing crypto tax loss harvesting

• If youre a US resident, moving to a crypto-tax-friendly or no-income-tax state

• Moving to Puerto Rico

• Moving to another crypto-tax-friendly country

• Taking a crypto loan for investment and deducting the interest

• Investing in crypto by using a self-directed IRA.

• Delaying crypto taxes with specific identification instead of FIFO

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What Is Specific Identification

Taxpayers can also elect to use Specific Identification. Specific Identification allows a taxpayer to select which particular cryptocurrency unit is being disposed of in a transaction. This allows a taxpayer to optimize the tax calculation in order to minimize any gains or obtain losses.

In the example above, the taxpayer is able to identify theyre disposing of assets acquired on July 1 and September 1. Using Specific Identification would result in a $2,000 net capital loss as opposed to a $7,000 net capital gain under FIFO as shown above. Here, its preferable to use Specific Identification to dispose of assets with the highest cost basis first, an approach known as highest in first out .

Crypto And Us Income Taxes: When And How Is Crypto Taxed As Income

From staking to sweepstakes, some of your crypto earnings, winnings, and more might be subject to U.S. federal income taxes.

In 2021, crypto reached the mainstream, which means theres a good chance youve made one or more crypto moves recently like spending, staking, lending, and more. But for the millions of Americans who entered the cryptoeconomy for the very first time last year, its crucial that you start thinking about one of the less-fun aspects of your journey: taxes.

First things first…

Coinbase doesnt provide tax advice. This article represents our stance on IRS guidance received to date, which may continue to evolve and change. None of this should be considered as advice or an individualized recommendation, but its important to us that our readers have relevant information available to them in the most accessible way possible. Please consult a tax professional regarding your own tax circumstances.

There’s a long list of crypto activities youll need to report to the IRS. In the U.S. the most common reason people need to report crypto on their taxes is that theyve sold some assets at a gain or loss so if you buy one bitcoin for $10,000 and sell it for $50,000, you face $40,000 of taxable capital gains.

However, the crypto universe is expanding fast theres just so much more to do than simply buying and selling, and crypto reporting can be tricky, as gains you receive from certain activities count as ordinary income.

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How Are Airdrops And Hard Forks Taxed

They are both taxed the same as ordinary income based on the value of the coins at the time that the taxpayer obtains control of the coins. The IRS provided their analysis on this in Rev. Rul. 2019-24.

One thing to make clear is that an airdrop does not follow a hard fork an airdrop is a marketing event in which coins are sent to users who meet certain criteria. A hard fork is a change to the protocol that results in a new coin being given to users who held the forked coin, for example, Bitcoin went through a hard fork in 2017 and created Bitcoin Cash.

Regardless of the name, airdrops or hard forks result in taxpayers receiving new coins. If you have any new coins in your wallet from seemingly thin air, this is taxable as ordinary income based on the fair market value of the coins upon control.