First understanding crypto taxes
In less than a decade, cryptocurrencies have gone from being an obscure plaything of computer geeks to a mainstream phenomenon. At first the coins were limited to Bitcoin and the platforms it inspired, but more recent years have seen a proliferation of new types of crypto-currencies.
More than 10% of Americans have traded crypto in the last year. If you’re one of them, read on to find out how your trades and other crypto activity will impact your taxes.
If you live in the US, then you need to report any crypto transactions to the IRS and your state taxes commission. Each of these different transactions has a different tax implication.
In this article, you’ll learn about crypto taxes and how your activity might affect them.
Working of crypto taxes
It is possible that your cryptocurrency will be subject to capital gains if you trade it for another cryptocurrency, or currencies other than U.S dollars.
The United States’ Internal Revenue Code (USIRC) defines capital gains as “income from the sale or exchange of a capital asset.” A capital asset is defined as any property owned by a person if the property has increased in value since it was purchased.
When you buy an asset, you need to calculate your gain or loss and report this on your tax return. When you sell the asset, the price at which it was exchanged is called ‘basis’.
If it increases in value then this is known as a ‘gains’ and if it decreases in value then this is a ‘loss’. Generally, the tax rate depends
Do you have to report crypto on taxes if you don’t sell?
The IRS has stated that cryptocurrencies are taxable, and the amount of tax owed depends on whether it is a capital asset or a personal use asset.
There are two ways to classify cryptocurrency: as either a capital asset or a personal use asset. If the cryptocurrency is classified as a capital asset, then any time you trade your crypto for anything else, such as cash or other cryptocurrencies, then it will be considered as a sale and you will incur taxes for that transaction.
If the cryptocurrency is classified as personal use, then any time you trade your crypto for anything else, such as cash or other cryptocurrencies, it will not be considered as a sale and there will be no taxes incurred.
Reporting taxable Requirement For Crypto Gains and Losses?
The IRS has decided to treat cryptocurrencies as property for tax purposes. This means that the price of a cryptocurrency is not subject to capital gains taxes when it’s exchanged for dollars or another currency. But when you sell or trade one cryptocurrency for another, then any increase in value may be taxable.
There are three different levels of taxation for crypto-currency. Depending on how someone acquires their crypto, it is taxed at either long-term capital gains rates, short-term capital gains rates, or as ordinary income.
In 2022, to see if you owe taxes on your crypto transactions, it’s important to think about how you used them. Trading crypto in exchange for goods or services are called taxable events. Otherwise they are classified as non-taxable.
Let’s see what comes under as taxable
List of non taxable event
1. Buying and selling cryptocurrency is not taxable: The Internal Revenue Service has a policy that states that virtual currency is treated as property. As such, it is subject to capital gains taxes.
This means that the buying and selling of cryptocurrencies are not taxable events and there are no income tax implications for the seller or the buyer when they buy or sell cryptocurrencies on an exchange
2. Buying cryptocurrency with cash and holding for long time: When you buy crypto, it’s not considered taxable income. The tax is put on when you sell the crypto or when you make a gain from it.
3. Receiving funds from the sale of your cryptocurrency holdings: Many people are looking for ways to earn money as the cryptocurrency market is experiencing a downturn. One of the most popular methods of earning in this down market is by buying and selling cryptocurrencies.
4. Using or spending your cryptocurrency holdings are not considered as income or capital gains: The IRS considers cryptocurrency as property, which means that it can be used as capital gains if you have sold it for a profit. However, using it to buy goods and services does not count as income or capital gains.
5. Trading one type of cryptocurrency for another type of cryptocurrency: Cryptocurrencies are not classified as money by the IRS. So, if you trade one type of cryptocurrency for another type of cryptocurrency, it is not taxable.
6. Donating crypto to non profit organization: Charitable giving is a great way to make your money work for you and the people who need it most. Giving crypto directly to a 501(c)(3) charitable organization like GiveCrypto.org can provide you with some tax benefits.
7. Receiving or giving gift with cryptocurrency: Cryptocurrencies are not considered money by the IRS and thus do not qualify as taxable income. This means that you do not have to pay taxes on any cryptocurrency you receive as a gift.
However, if you sell your cryptocurrency for profit, then it is subject to capital gains taxes.
If you want to give someone a crypto gift, then be sure to convert it into their desired currency before giving it away!
What about taxes if you receive crypto as salary and you don’t sell it?
If you get paid in crypto, you may have to declare your earnings as ordinary income even if you don’t convert it to FIAT (e.g., USD)..
This is the same reporting obligation as receiving your regular paycheck in USD. You will have to pay taxes on any gains when converting back to FIAT currency.
Is it taxable if I receive crypto from hard fork and don’t want to sell?
Every time a new cryptocurrency is created through a hard fork, new coins becomes in following trends. The fair market value of these new coins may be difficult to determine since the price of the original cryptocurrency will fall, but it will be worth more in terms of the second cryptocurrencies.
This can be tricky if there are no agreed market values at the time so it is important to keep your expenditure and income records updated to make things easier.
Is it taxable if you receive staking rewards but don’t want to sell?
Staking crypto rewards is a taxable event and you need to mark the gains for tax purposes. You will have to calculate the Fair Market Value (in USD) when you calculate your taxes each time.
All the batches need to be accounted and reported on your tax return as capital gains in accordance with IRS guidelines.
If you receive crypto interest from other vehicles, like stocks, bonds, staking or mutual funds, you have to follow the same procedure.
To determine the FMV of the interest you received, it should be declared as ordinary income.
Tracking the tax implications of cryptos investments can be a complicated process. However, there are plenty of crypto tax software out there that can help you make sense of it all such as CoinTracking, RoboTax, TradeTracker etc.
What happens if you don’t report your cryptocurrency related activity?
You may not have to deal with the consequences of an IRS audit. There are a few ways to report crypto activity and avoid facing penalties or criminal charges.
David Canedo, a Milwaukee-based CPA and tax specialist product manager at Accointing, a crypto tracking and tax reporting tool, suggests that it may be considered tax evasion or fraud when crypto investors don’t report their crypto gains on their taxes.