Usually, when an accountant gets a call from its client asking about taxes on their crypto investments, the theme of those calls is the same. The clients have no idea what to do with the taxes. However, it is not their fault. The crypto space is novel and still evolving fast. So fast that the Internal Revenue Service (IRS) is still figuring out the crypto tax rate, how to exactly treat crypto on US tax returns, and more.
Gradually, the guidance is becoming clear as cryptocurrency adoption is growing. Also, taxpayers are diligently reporting their crypto taxes all thanks to the mandatory question on Form 1040,” At any time during the year, did you sell, receive, exchange, or dispose of any financial interest in any virtual currency?
Think of crypto like stockholding. If you hold it for long-term (over a year), the proceeds are subject to long-term capital gains tax. The crypto tax rate for your profits could be 0, 15, or 20 percent depending on your income level.
If you don’t sell your crypto investments, there will be no taxable event. But, if you sell within a year, it will be considered a short-term holding and the gains will be treated as ordinary income, and the crypto tax rate will be determined as per your tax bracket.
Taxpayers buying and selling from major crypto exchanges such as Robinhood or Coinbase get annual statements, which makes crypto tax reporting easy. Otherwise, taxpayers have to be diligent about record-keeping. Nowadays, things are getting really tricky because more investors/traders are earning crypto as a salary or payment for their services. In this case, it is considered ordinary income depending on the value of the token on that particular day. Similarly, if you’ve paid for goods or services with crypto, it is considered a taxable event, if the value of the token increased when you originally acquired it.
Last-Minute Tax Tips
If you’ve invested in crypto and want to know some last-minute tips to save yourself some time and money, here are some last-minute crypto reporting tips:
Tax Loss Harvesting
One of the key strategies is loss harvesting, selling investments to realize losses. Taxpayers can use losses to offset taxable gains realized during the year. It is also important to note that losses offset gains dollar by dollar.
If the taxpayer has more than $3,000 in losses, it can be carried over to the next year. A taxpayer can use losses to offset any gains and up to $3,000 of other income. More importantly, a taxpayer can carry over the losses year after year as long as they live.
Another way of saving taxes on crypto is to give it away as a gift. If you are gifting it to an individual, you can gift up to $15,000 a year. In case you are gifting crypto to a charitable organization, you can donate directly to the needy and get a tax deduction in the process. But, keep in mind that you should not sell it yourself and give away the proceeds as charity. In this case, you will trigger a taxable event by selling it first.
Ask For an Extension
If a taxpayer is running up against the year’s filing deadline without knowing how much tax they owe to the IRS, they can ask for the standard six-month extension. The good thing is, that the taxpayer doesn’t even have to give a reason for this.
While you still have to pay taxes after six months, it will give you an ample amount of time to consult tax professionals to sort out your obligation and report all the transactions properly. We highly recommend that taxpayers take advantage of this.
Contribute to Retirement Accounts
A tax-deferred crypto retirement plan is an excellent investment. A company-sponsored 401(k) plan is the best as the employer has to match the contributions. Also, the investment grows significantly because it compounds over time. Also, making deductible contributions can reduce the taxable income of the year.
For every taxpayer, taxes are inevitable. Rather than trying to avoid taxes, it is imperative that a taxpayer must understand tax reporting, crypto tax rates, tax-loss harvesting, and other aspects. If understood properly, a taxpayer can not only save money but also avoid serious penalties from the tax authorities.
1. How are taxes handled with Crypto?
Yes, your crypto investments are taxable. The IRS sees crypto holdings as property for tax purposes. This means that your crypto holdings will be taxed in the same way as any other asset such as stock or gold.
2. Do I need to pay tax on crypto profits?
Yes, you’ll have to pay taxes if you earn an income by selling or exchanging your crypto tokens. If you just hold your tokens, you don’t have to pay any tax. However, if you hold for more than a year, you have to pay long-term capital tax. And if you sell within a year, you have to pay short-term capital gains tax on the earnings.
3. Can the IRS track cryptocurrency?
Yes, the IRS can track your cryptocurrency. If you use major crypto exchanges such as Coinbase, Gemini, or others, they will send Form 1099-B to you and to the IRS tracking your cost basis, gains, and losses.