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December 23, 2021

How is Crypto Taxed?

From the meteoric rise of Bitcoin to the pumping of some of the most notorious meme coins in the game, many people have made millions by HODLing and others got the rug pulled out from under them by investing in the squid game coin and others. Regardless of whether you’re riding around in your bitcoin Lambo now or taking out a third mortgage to cover your losses, now comes the time to pay taxes.

Oh, you thought crypto wasn’t taxed? Well, the IRS is stepping up it’s game and enforcing crypto taxes across the board. Now, while one solution to avoid taxes on crypto might be starting your own country on an abandoned WWII sea fort, unfortunately, if you sold or traded crypto you’re probably going to have to pay up.

On the flipside, if you lost a ton of money in crypto, then you’ll want to make sure you file taxes so you can claim that loss and reduce your tax burden.

Why is crypto taxed?

But, isn’t crypto supposed to be off the grid? And how do taxes even work for decentralized digital currencies? Well, let’s break it down simply.

When you go to file your taxes in the US, the IRS is going to ask you whether you owned crypto. So, you’re on the hook to answer definitively whether you did. Or else.

After answering yes, you might be thinking, how am I even supposed to calculate my crypto taxes if I don’t get tax paperwork from the exchange or exchanges I traded on? Commonly known as a 1099, crypto exchanges aren’t required to give you a document detailing all the trades you made in a year. 

But, and big surprise here, the IRS still expects you to report it all. And what do you do if you sent crypto from your wallet to an exchange, swapped that coin for another, sent it to another exchange, and then cashed out? What do you even pay taxes on?

Well, any gains you make are treated like capital gains by the IRS. So, if you traded or sold crypto that you held for under a year, you’ll pay short-term capital gains, and if you traded or sold crypto you owned for over a year, you’ll get a slight break on taxes and pay long term capital gains. 

How much tax do you owe?

This luckily makes the answer of “how much tax do I have to pay on crypto pretty simple. And if you lost money, you can use it to offset other capital gains or realize the loss against your income, up to $3000 a year. So, that rug pull you fell for can actually save you some money come tax time. 

All this still doesn’t answer the question of how you even calculate your capital gains. Since there’s also gas fees, exchange fees, varying exchange and price rates between cryptos and fiat currencies, crypto taxes can get pretty tricky pretty fast. 

How do you calculate your crypto taxes? Well, you could start going crazy with excel sheets and doing it all by hand - OR - you could use Ledgible. Legible Crypto Tax automatically calculates your crypto taxes. You can Quickly connect your wallets, exchanges, and more, then Ledgible Crypto Tax can calculate your crypto tax burden, provide current year planning, and prepare reports for your tax preparer or preferred tax software. They offer DIY and professional solutions for tax preparers, they’re even independently audited to ensure security for your information. You can get started for free by clicking the link in the description.

So, calculating crypto taxes doesn’t have to be hard, but it can get a little messy. While the IRS is still working on their complete crypto tax guidance, in the meantime, you’re still expected to pay up.

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