What Crypto Currency Taxes Must I Pay? (2023 US Guide)
Since the beginning of cryptocurrencies, there has been a debate about how to tax cryptocurrency.
Some are pushing for no taxation at all. This isn’t logical, given that almost every other asset is taxed somehow, especially income-producing ones like stocks and bonds.
While others are pushing for 100% taxation on all trades, while this would create a large revenue for the US government, it isn’t ideal because people would avoid paying these taxes.
In this article, I will explain how to pay your cryptocurrency taxes and some good ideas for taxation to save you money.
What Are Cryptocurrency Taxes, and How Do They Work?
The capital gains tax rules apply to cryptocurrencies (such as Bitcoin and Ethereum).
The IRS classifies cryptocurrency as a capital asset, and you are taxed when sold at a profit. This is precisely what happens when you sell funds for a gain.
The capital gains taxes you must pay depend on how long you’ve held your cryptocurrency (Sometimes it reaches 15% taxes).
If you haven’t yet reached 1 year, your profits will be taxed at short-term capital gains rates (also known as your regular income tax rate).
However, if it’s been at least a year since you acquired your coins, you reclaim them. You can also claim a capital loss if your crypto investment has dropped in value when you sell it, which you may use to offset other income taxes.
But there are several more complexities surrounding cryptocurrency taxes.
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Do you currently own cryptocurrency, or are you using it?
You must report if you’ve traded in cryptocurrency on your 2021 tax return.
The Form 1040 at the top asks, “Did you acquire, sell, send, exchange, or otherwise acquire a financial interest in any virtual currency throughout 2021?”
If the IRS asks about cryptocurrencies, you answer whether you’ve used them.
You could be in danger of deceiving the IRS if you don’t respond truthfully, and the IRS isn’t a fan of lies and tax cheats.
However, In a recent clarification, the IRS stated that people who only purchased virtual currency with real money were not required to answer “yes” to the question.
You may be required to pay taxes if you use crypto
You might believe you will be tax-free if you trade but do not trade cryptocurrency.
That is not correct. You may incur a tax obligation whenever you trade digital currency for real money, goods, or services.
In the case of cryptocurrency, if you sell for a price greater than your cost basis in it, you’ll be creating a liability.
You will incur a tax liability if your cryptocurrency’s value exceeds its cost basis.
You may also deduct a tax loss if the value of goods, services, or real currency is lower than your cryptocurrency cost basis.
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Didndidn’t you get the 1099 form?
You’ll receive a Form 1099 from a bank or brokerage reporting your yearly earnings. This may not be the case with cryptocurrency.
There isn’t yet the same reporting level for cryptocurrency as for stock, interest, and other repayments on 1099 forms.
The IRS receives limited information from Coinbase and other exchanges.
However, beginning on Jan. 1, 2023, a new law set to take effect in November 2021 will demand more tax reporting for those working in the sector.
Brokers who merely transport digital assets for others must provide the IRS with that information on a 1099 or similar form.
The bill’s opponents say that it would apply to everyone who transports cryptocurrency, including miners and crypto wallets and those without access to the information.
However, lawmakers are already working on new legislation to define who the measure applies to in more detail.
But the fact that you don’t have 1099 won’t exempt you from any tax charge, and you’ll still be required to disclose your profits and pay taxes on them.
It’s not all bad, though; if you had to take a capital loss, you can deduct it from your income and decrease your taxable income.
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How to File Your Cryptocurrency Taxes Step-by-Step
Here are 4 things to bear in mind when filling your cryptocurrency taxes:
1) Keep track of all transactions
Crypto is like any other form of currency. You have to keep track! What currencies do you pay with? How much did they cost, and when were they bought, sold or traded in for more valuable ones? Who made the exchange?
Make sure that whenever someone gives away crypto as a gift, it’s recorded on your spreadsheet, too, so there are no surprises later down the line when tax time rolls around again.
While your crypto exchange may give you tax information on your cryptocurrency deals to the IRS, it will not record the cost basis or the original amount you paid for your crypto if you transfer coins between offline cold wallets and your account.
Several blockchain verification services are now available to clean the blockchain and reveal transactions between your wallets, whether on an exchange or not and provide reports for all transactions connected to the wallets you provide within a specified tax year.
2) Fill out the required tax forms
You’ll need to complete different tax forms depending on how you utilized your cryptocurrency after you have a record of your transactions:
Form 8949 documents all of your crypto investments. This should contain the total number of coins, the date and price you acquired them, the date and price you sold them, and your earnings or loss on each exchange.
Schedule D compiles your capital gains and losses from all sources, including cryptocurrency.
If you received bitcoins due to mining, you must state whether you acquired them as a business or for pleasure in Schedule C form.
You may be required to pay self-employment taxes if your crypto mining firm earned money throughout the year.
You’d claim this revenue on Line 8 of Schedule 1 if you declare crypto mining a hobby. You won’t have to pay self-employment tax, but you will be restricted in what you can deduct as an expense.
3) Hire a Professional Tax Planning Consultant
It might be tough to plan for cryptocurrency taxes, especially because the regulations surrounding them are always changing.
Suppose you’ve made a lot of money from cryptocurrencies. In that case, consulting a CPA specializing in internet tax services is probably worth consulting, so you don’t have to worry about the IRS later.
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Here 3 Tips to minimize your Cryptocurrency Taxes
1) Withdrawals and Positives With Losses
You can also use crypto earnings to cover other investments’ losses in the year you make a profit.
That implies if you made $20,000 by selling Ethereum but lost $20,000 by selling Litecoin, you won’t have to pay any taxes since your profits were equal.
Even if you know the risks, litecoin and Ethereum have caused massive losses for traders.
2) Claiming Mining-Expenses
Mining crypto is not as simple as it appears in principle.
In addition to computers, servers, power, and internet service provider costs, mining crypto entails significant expenditures.
Youyou’reeduct these costs from your mining income if you’re a crypto miner. However, the amount you can claim will be determined by whether you categorize your business or hobby.
3) Tax Rate and Sales Results
If you have more time, it’s always worth waitiit’sfor a lower tax rate.
Perhaps you lost your job, returned to school, or moved to a lower-tax state.
Then you might find yourself in a lower tax bracket, which allows you to sell your Bitcoin while reducing your taxes.
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1) Do you have to pay taxes on crypto that you mine?
It’s taxable if you make money from bitcoin mining, get it as a gift or payment for services or goods, or receive it in exchange for anything.
You owed tax on the entire fair market value of the cryptocurrency at your regular income tax rate on the day you received it.
2) What happens if you don’t report your crypto profits on taxes?
If you don’t disclose your cryptocurrency on Form 8949, the IRS is likely to audit you. Even if you had profits or losses.
3) How does the IRS know you sold cryptocurrencies?
The IRS considers cryptocurrency to be property, and when it’s sold for a profit, the tax collector will charge a capital-gains tax. If the IRS is aware of the transaction.
4) Is it possible to go to jail for not reporting cryptocurrency?
The Department of Justice has announced that: any transaction valued at more than $10,000 in digital currency will be treated as if it were cash.
And failure to report the identity of the payer for the digital assets would be considered a felony offense. Noncompliance may result in up to five years’ imprisonment.
5) What is the best way to report cryptocurrency on my taxes?
The Form 8949 is a tax form used to record cryptocurrency capital gains and losses. Each transaction of crypto during the tax year is recorded on the 8949.
If you have other non-crypto assets, they must be documented on separate Forms 8949 when you submit your taxes.