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Cryptocurrency has grown in popularity in recent years, with an increasing number of people investing in digital assets such as Bitcoin, Ethereum, and Litecoin. However, as the use of cryptocurrency grows in popularity, questions about how it should be taxed have emerged. If you're new to the world of cryptocurrency, it can be hard and confusing to figure out how taxes work. In this post, we'll go over the basics of what you need to know about cryptocurrency taxation in the United States and what you need to do to stay in compliance. This guide will help you understand your obligations and make informed decisions.
If you live in the United States Of America, the IRS treats cryptocurrency as property. They don't view Bitcoin as a currency, as the US Dollar is the only recognized form of money in that country. Certainly, the IRS doesn't want Bitcoin as a competitor to the USD. That's why I like to classify these digital assets as crypto assets because it gets the point across plainly.
In a given tax year, if you receive more than $20,000 in proceeds and 200 transactions from a cryptocurrency exchange, the exchange is required to send you a Form 1099-K detailing the proceeds for each month. The exchange will also send a copy of this form to the IRS. If you file a tax return without including the proceeds listed on Form 1099-K, the IRS' Automated Underreporter (AUR) system will flag your return for underreporting, and you may receive a notice similar to CP2000. The same rules apply if you receive a Form 1099-B but do not report it.
Popular crypto exchanges such as Crypto.com, Coinbase, Kraken, and others have your information which can be sent to the IRS for tax reporting purposes. To the best of my knowledge, these exchanges will only supply your information if requested by the IRS in the event they suspect you of either not reporting or under-reporting your taxes, that's something to keep in mind when you're signing up for an exchange.
Capital Gains Tax
You will have a short-term capital gain or loss if you sell or exchange cryptocurrency that you have held for less than a year. You will have a long-term capital gain or loss if you have held it for more than a year. The holding period for cryptocurrency begins the day it is acquired and ends the day it is sold or exchanged. For tax purposes, short-term and long-term capital gains and losses are treated differently, with short-term gains generally being taxed at a higher rate.
As I stated in my previous tax article for Canadians, if you decide to buy and sell your crypto within a short time frame to capitalize on price action, you need to remember your tax obligations. For example, let's say you bought Cardano Monday morning, and come Friday evening, the price of ADA (Cardano) rose some 10 percent and you decide to sell. You've just made a taxable event the moment you sell for a profit even if you decide to buy back ADA when the price pulls back down, say 15% or so and you buy back in at a cheaper price. This is what we call Trading and millions of traders around the world are not only trading cryptos, but forex, and commodities. Because the tax rate will be lower if you hold an asset for more than a year, you'll find many of us investors HODL our crypto for the long run before selling an asset.
IRS Capital Gains Tax Rates
Individuals pay no more than 15% tax on most net capital gains. Some or all net capital gains may be taxed at 0% if your taxable income is less than or equal to certain thresholds ($40,400 for singles, $80,800 for married filing jointly, or qualifying widow(er)). If your taxable income exceeds these thresholds but is less than or equal to certain other thresholds ($445,850 for single; $501,600 for married filing jointly or qualifying widow(er); $473,750 for the head of household; or $250,800 for married filing separately), a capital gain rate of 15% applies. If your taxable income exceeds these limits, you will be subject to a 20% net capital gain tax. There are a few exceptions, such as gains from selling section 1202 qualified small business stock (maximum rate of 28%), net capital gains from selling collectibles (maximum rate of 28%), and unrecaptured section 1250 gain from selling section 1250 real property (maximum rate of 25%). Net short-term capital gains are taxed at graduated rates as ordinary income.
Remember you're only paying taxes on your gains. So if you bought $1000 worth of Bitcoin and sold it for $1800 worth of BTC, you're paying either short-term or long-term capital gains on $800.
You can find more information regarding your tax obligations on the IRS website.
Koinly Automated Crypto Tax Software
To simplify the entire crypto tax process, I use Koinly.
Koinly is a software company that provides an automated tax tool that assists individuals, business owners, accountants, and tax professionals in calculating cryptocurrency taxes and generating tax-compliant reports. The platform is simple to use and can generate reports for more than 20 countries while covering over 17,000 cryptocurrencies and connecting to over 350 exchanges. This tool will save you time and frustration when it's time to file your taxes. After you've connected your crypto exchange, just download and print your tax report and take it to your tax guy and he'll handle the rest.
Paying your crypto taxes is an important part of being a responsible crypto investor. Not only is it the law, but it also helps to ensure the continued growth and stability of the cryptocurrency market. While the process of calculating and reporting your crypto taxes may seem daunting at first, there are resources available to help make it easier. By using tools like Koinly's Crypto Tax software, you can easily and accurately calculate your crypto taxes and generate compliant reports for your tax returns.
Staying compliant with your crypto taxes is crucial, as failing to do so can result in fines and penalties. However, by taking the time to understand your obligations and staying on top of your tax reporting, you can avoid these potential pitfalls and enjoy the many benefits of investing in cryptocurrency. So don't delay – get started on your crypto tax compliance today and be confident that you're doing your part to support the future of this exciting and rapidly-evolving market.