What to Know About Your Crypto Taxes

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The Internal Revenue Service (IRS) is hiring an additional 87,000 new agents to help enforce cryptocurrency tax laws. This news comes in the wake of the IRS’ recent efforts to crackdown on crypto investors who have failed to report their digital asset holdings. If you’re one of these investors, here’s what you need to know about your taxes.

Why is cryptocurrency taxed at all?

In the United States, cryptocurrency is taxed as property. This means that every time you buy, sell, or trade cryptocurrency, you’re required to pay capital gains taxes. The IRS has said that it considers Bitcoin and other digital assets to be “intangible personal property,” and as such, they are subject to capital gains taxes.

 

The IRS first began cracking down on crypto investors in 2016 when it launched an investigation into the practice. Since then, the agency has issued guidance on how it intends to tax cryptocurrencies. In 2018, the IRS sent out more than 10,000 letters to crypto investors warning them of their tax liability. And just last month, the IRS announced that it was hiring 87,000 new agents specifically to help enforce cryptocurrency tax laws.

When do you owe taxes on your crypto?

Generally speaking, you owe taxes on your crypto holdings when you “realize” a capital gain. This can happen when you sell your cryptocurrency for fiat currency (like USD), trade it for another cryptocurrency, or use it to purchase goods or services.

 

If you hold your cryptocurrency for less than a year before selling it, then you’ll owe short-term capital gains taxes. These are taxed at your ordinary income tax rate, which ranges from 10% to 37%.

 

If you hold your cryptocurrency for longer than a year before selling it, then you’ll owe long-term capital gains taxes. These are taxed at a lower rate, ranging from 0% to 20%, depending on your tax bracket.

 

In addition to capital gains taxes, you may also owe self-employment taxes if you’re considered a “crypto trader.” The IRS has not yet released guidance on how it intends to tax crypto trading, but it’s likely that traders will be taxed as self-employed individuals. This means they’ll owe both income taxes and self-employment taxes (which are currently 15.3%).

 

Finally, it’s important to note that you may also owe state and local taxes on your crypto holdings. While a handful of states have enacted specific laws regarding the taxation of cryptocurrencies, most states treat crypto as property for tax purposes. This means that you’ll owe state and local taxes on your crypto holdings if you live in a state that has an income tax.

When do you need to report your crypto taxes?

 

The IRS requires you to report your crypto taxes every year. This means that you’ll need to keep track of all of your cryptocurrency transactions throughout the year and report them on your tax return.

 

If you don’t properly report your crypto taxes, you may be subject to penalties from the IRS. These penalties can include interest charges, late payment fees, and even criminal prosecution in extreme cases.

 

If you’re not sure how to report your crypto taxes, there are a few resources that can help. The IRS has published guidance on how to report cryptocurrency taxes, and there are also several online tools that can help you calculate your tax liability.

In What situations is your crypto not taxed?

There are a few situations where you may not owe taxes on your crypto holdings.

Receiving a gift

If you receive a gift of cryptocurrency from someone, you generally don’t owe taxes on it. This is because gifts are not considered taxable income.

 

However, there are a few exceptions to this rule. If you receive a gift of cryptocurrency from a foreign person, you may owe taxes on it. And if the value of the gift is over $15,000, you may also owe gift taxes.

Selling your crypto for a loss

If you sell your cryptocurrency for less than you paid for it, then you may be able to deduct the loss on your tax return. This is because losses can be used to offset other capital gains.

 

However, there are a few restrictions on this deduction. First, you can only deduct up to $3,000 in losses per year. And second, you can only deduct losses if you itemize your deductions on your tax return. If you have more than $3,000 in losses, you can carry the excess forward to future years.

Giving a gift

 

If you give a gift of cryptocurrency to someone, you generally don’t owe taxes on it. This is because gifts are not considered taxable income.

 

However, there are a few exceptions to this rule. If you give a gift of cryptocurrency to a foreign person, you may owe taxes on it. And if the value of the gift is over $15,000, you may also owe gift taxes.

Donating to a charity

 

If you donate cryptocurrency to a qualified charity, you can deduct the donation on your tax return. This is because charitable donations are tax-deductible.

 

How much is cryptocurrency taxed?

 

The amount of tax you owe on your cryptocurrency holdings depends on a few factors, including:

 

– whether you’re selling or using it for purchases

– how long you’ve held the cryptocurrency

– what tax bracket you’re in

 

For example, if you sell cryptocurrency that you’ve held for less than a year, you’ll owe short-term capital gains taxes on the sale. These taxes are typically taxed at your ordinary income tax rate, which ranges from 10% to 37%.

 

If you hold cryptocurrency for more than a year before selling it, you’ll owe long-term capital gains taxes. These taxes are typically taxed at a lower rate than short-term capital gains taxes, which ranges from 0% to 20%.

 

The amount of tax you owe also depends on what tax bracket you’re in. For example, if you’re in the 10% tax bracket, you’ll owe 10% in capital gains taxes on your cryptocurrency holdings. But if you’re in the 37% tax bracket, you’ll owe 37% in capital gains taxes.

Are All Cryptocurrencies taxed?

Yes, even your obscure altcoins are taxed. It doesn’t matter if its bitcoin, Ethereum dogecoin or something else. If you profit from selling, using or even gifting it then the IRS wants a share. Even NFTs are taxed.

How is the IRS tracking your cryptocurrency?

The IRS has a few methods of tracking cryptocurrency. First, they can track transfers of cryptocurrency through exchanges. These exchanges are required to report any transfers of $10,000 or more to the IRS, and many of them require your personal information including social security number.

 

Second, the IRS can track purchases made with cryptocurrency. This is because most merchants who accept cryptocurrency also accept credit cards. When you use your credit card to buy cryptocurrency, the merchant will report the purchase to the credit card company. The credit card company will then report the purchase to the IRS.

 

Lastly, the IRS can track your cryptocurrency holdings through your bank account. This is because most banks require you to report any cryptocurrency holdings over $10,000.

What happens if you don’t report your crypto taxes?

 

If you don’t report your cryptocurrency taxes, you may be subject to penalties and interest. The IRS can also audit you and require you to pay back taxes, plus interest and penalties.

 

So it’s important that you report your cryptocurrency taxes properly. If you’re not sure how to do this, you can consult with a tax professional. They can help you figure out what you need to do and make sure you file your taxes correctly.

What do you need to do if you haven’t been paying your crypto taxes?

If you haven’t been paying your crypto taxes, the first thing you need to do is come clean. The IRS has said that it will amnesty for those who voluntarily disclose their failure to pay taxes on their digital assets. This means that

How do you lower your crypto taxes?

There are a few ways you can lower your crypto taxes. One way is to take advantage of the IRS’ long-term capital gains tax rate, which is lower than the short-term rate. A Cryptocurrency IRA is also a great way to lower your crypto taxes. You can invest up to $5,500 per year in a Cryptocurrency IRA, and you won’t owe any taxes on the growth of your investment.

 

Another way to lower your crypto taxes is to donate cryptocurrency to a qualified charity. Charitable donations are tax-deductible, so you can deduct the amount of your donation from your taxable income.

 

Lastly, you can use cryptocurrency to pay for goods and services. The IRS views these payments as barter transactions, and they’re not taxed. So if you use cryptocurrency to pay for a coffee or a new pair of shoes, you won’t owe any taxes on the purchase.

 

As you can see, there’s a lot to know about cryptocurrency taxes. But it’s important to stay up-to-date on the latest tax laws so you don’t get caught off guard. And if you’re ever unsure about how to file your taxes, be sure to consult with a tax professional. They can help you figure out what you need to do and make sure you file your taxes correctly.


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