Are you a Crypto Trader trying to understand how to pay taxes? Or, perhaps, trying to figure out how to pay as little taxes as possible? In this post the crypto tax experts from Ledgible will walk you through all of the important things to know for crypto traders trying to figure out how to pay taxes – or minimize their taxes – in the US.
Unfortunately, the IRS is working hard and even ramping up their enforcement of cryptocurrency tax payment, meaning that now is the time to make sure you have everything in order. Even with this understanding, the guidance that the IRS has put out on cryptocurrencies is quite vague, meaning that there are a lot of opportunities for interpretation by tax professionals for unique crypto scenarios. Due to the in-exactness of the cryptocurrency tax landscape, we'll stop short of providing crypto tax advice and rather equip you with the tools necessary in order to be able to file your taxes, work with a crypto tax professional, and ultimately minimize your crypto tax burden for crypto trading.
Do I have to pay crypto taxes?
Unfortunately, the IRS requires that crypto traders pay tax on their crypto trades and earnings. However, this doesn't mean that if you own crypto you have to give the IRS a cut of it - rather just your profits will end up getting tax. Conversely, this also means that any losses you had on crypto can be deducted from your tax bill, potentially setting up active crypto traders for a sweet scenario where they can hang onto their coins and save money on the rest of their tax bill.
In simple terms, taxes are due when you sell, dispose, or trade cryptocurrencies. However, while these are transactions that trigger a taxable event, you'll only be taxed on the gains that these events recognize. For example, if you owned $1000 of Bitcoin and moved it to a cold wallet, then transferred it to another exchange, then sold $500, and transferred the rest back into a separate cold wallet. According to the IRS, that's a total of 4 taxable events. The good news is you only pay taxes on the total gains as a difference of your acquisition and disposal cost.
In this scenario, say the price of Bitcoin remained fairly constant throughout all these transactions. This means that your total gain, even after selling the $500 worth of bitcoin, is roughly zero, as you would've made no gain from the trades. If the price of bitcoin was fluctuating throughout this entire string of transactions, like would be normal in the volatile world of crypto, then each of these events will likely represent a tiny gain or loss. Summing up all of these gains or losses leaves you with your total gain/loss. Then you would simply owe taxes on these gains – or be able to save on your tax bill if it's a loss.
For active cryptotraders, it can get complicated, and fast.
What are the crypto tax rates?
Crypto tax rates vary based on how long you've held the crypto. For active crypto traders, chances are you're going to be paying short term capital gains taxes on your trades, which will end up being higher than the longer-term capital gains taxes that a crypto HODLR might end up paying.
Here's a look at the capital gains tax rates:
Short Term Capital Gains
|Filing Status||Taxable Income|
|Single||Up to $9,950||$9,951 to $40,525||$40,526 to $86,375||$86,376 to $164,925||$164,926 to $209,425||$209,425 to $523,600||Over $526,601|
|Head of household||Up to $14,200||$14,201 to $54,200||$54,201 to $86,350||$86,351 to $164,900||$164,901 to $209,400||$209,401 to $523,600||Over $523,600|
|Married filing jointly||Up to $19,900||$19,901 to $81,050||$81,051 to $172,750||$172,751 to $329,850||$329,851 to $418,850||$418,851 to $628,300||Over $628,301|
|Married filing separately||Up to $9,950||$9,951 to $40,525||$40,526 to $86,375||$86,376 to $164,925||$164,926 to $209,425||$209,426 to $314,150||Over $314,151|
Long Term Capital Gains
|Filing Status||Taxable Income|
|Single||Up to $40,400||$40,401 to $445,850||Over $445,850|
|Head of household||Up to $54,100||$54,101 to $473,750||Over $473,750|
|Married filing jointly||Up to $80,800||$80,801 to $501,600||Over $501,600|
|Married filing separately||Up to $40,400||$40,401 to $250,800||Over $250,800|
Taxable Events: Do you owe cryptocurrency taxes?
While there are a variety of taxable events in the ever-changing world of cryptotrading, generally speaking your main taxable events for crypto traders are going to be:
- Selling crypto for fiat
- Using crypto for goods and services
- Trading or exchanging crypto for another cryptocurrency
All of these events represent disposals of a given asset in the eyes of the IRS, meaning that each of these events will trigger a new calculation of capital gains or losses. In order to do this properly, you'll also have to understand your cost-basis, or the value you bought all of the digital assets for. Luckily, automated crypto tax tools like Ledgible handle this automatically (and thanks to Ledgible's on-chain nodes, does it better than the competition).
The most surprising part of the list of taxable events for you might be the trading or exchanging of crypto for another. While you still end up owning crypto, in the IRS, you've actually sold the first crypto to buy the other. This can get complicated in various swapping scenarios where you have to move from stablecoins to newer tokens on various different exchanges or protocols. These scenarios are what can make taxes a huge headache for crypto traders, necessitating the use of an automated tax tracking tool.
What you'll need to report cryptocurrency on your taxes
You're going to need Form 8949, a form that the Ledgible tax platform provides. To generate this form you're going to need:
- The coin/asset/crypto name
- The purchase or acquisition date
- The disposal or sell date
- The proceeds you got from the disposal
- The cost basis, or the initial cost of the asset for you
- The total gain and/or loss of the asset(s)
Different Crypto Tax Scenarios
In the complicated world of crypto, there are other non-standard scenarios like mining, staking, and lending that can get complicated. Mining is treated like normal income from a job by the IRS and staking income generally isn't taxed until you sell the rewards.
Lending crypto and receiving interest payments does generally mean that you'll have to pay taxes on the interest income. But in these scenarios, it's important you consult a tax professional to make sure you're handling everything properly.
If you want to learn more about cryptocurrency taxes and how to minimize your tax burden, you can read more on our Blog, here.