Investing in cryptocurrency and earning a profit is already a challenge. But do you know that you also have to pay taxes for any profits you make?
This might sound like it goes against the principle of decentralization but at the end of the day, using your existing cash to earn profits is called investing, and investing is taxable.
To know how much you should pay your crypto taxes every year, you must keep track of your buys and sells, which is indeed troublesome. If you trade on an exchange, there is a crypto tax calculator built-in for you. If you trade or invest outside of exchanges, you can find other paid crypto tax calculators online to help.
Skipping on paying your crypto taxes can come with consequences so you should report your incomes accurately every year.
How is Cryptocurrency Taxed?
The IRS taxes cryptocurrency not as a currency but as property and investments. All transactions including selling coins to using cryptos for purchases are subject to the same tax treatment as other capital gains and losses.
If you are a long-term crypto investor and hold crypto for at least a year, you can benefit from the long-term capital gains tax, which is lower. This ranges from 0% to 20% depending on your income level. Short-term crypto gains tax is charged 10% to 37%, similar to other incomes.
You can also be taxed for mining, purchasing with crypto, and also selling crypto. Any crypto investing that earns an income will have to be taxed.
How to Report Your Crypto Tax?
As a crypto trader and investor, tax regulations require you to keep track of your gains and losses. The IRS also added a question to tax return forms asking filers whether they received, sold, exchanged, or otherwise disposed "of any financial interest in any virtual currency."
To make sure your tax is accurate and stays within the laws, it is important to record your crypto seriously.
- You will need to record the market value of your crypto when you bought it or mined it. You will also need to record the market value of it when you sold it or used it. This difference in prices will help you calculate your taxes.
- In stock trading, stock brokers are required to send you the 1099-B form to show the cost basis of your transaction. This is similar to crypto, and crypto brokers will now also be required to provide you with one from 2023 onwards.
- The 1099-K form might be issued if you are transacting more than $20,000 in payments and 200 transactions a year. These two conditions must be met for you to be eligible for this form.
How About Crypto Losses?
Crypto trading is difficult, and oftentimes, you will face losses. The good news is losses on crypto are counted as capital losses and can be used to offset other capital gains you make. Nonetheless, you cannot write off a loss of more than $3,000.
If you have losses on Bitcoin or any other cryptocurrency, make sure you declare them on your tax return and see if you can reduce your tax liability.
Crypto Tax Calculator
Keeping track of every of your cryptocurrency and checking the prices of when you buy and sell is indeed very difficult and time-consuming. That is why crypto tax calculator services have been invented to assist people when calculating their taxes.
If you trade on an exchange, there is a crypto tax calculator already built-in for you. You simply need to download your yearly report from the exchange and use the information to fill your tax report accordingly.
If you are not trading on an exchange for security reasons or any other reasons, you can find other crypto tax calculator services that are available for a cheap price.
One of the most simple crypto tax calculator services online is the Crypto Tax Calculator website. It is a paid service but in contrast to the time it might save you, paying for the crypto tax calculator might be worth it.
What Will Happen If you Don't Pay Your Cryptocurrency Tax?
Blockchain is decentralized and much data is stored and can be checked on the blockchain. The IRS uses many methods to keep taps on the crypto industry and many users among the popular crypto exchanges.
While you may not know that you need to pay taxes on your crypto gains, the IRS might not take pity on you.
The IRS may not have the resources to monitor every crypto investor there but if you are unlucky, not reporting your gains on crypto can get you in trouble so it is best to report your crypto gains and losses every time.
If you ignore the regulations and report, you will face fines in addition to taxes. If you don't pay the penalty on time, you will be charged interest. You may also face a full-on audit.
Long Term Investing
If you are lazy to do taxes and don't want to lose a large amount of income to taxes every year, it might be best for you to focus on long-term trading.
Long-term traders hold their crypto in secure cold wallets like the ELLIPAL Cold Wallet which is air-gapped and anti-tampered. When their crypto is stored within the cold wallet, they are not scared of any security risks that come with crypto and can just wait for their crypto to grow. At the end of the year, just calculate the differences and you will be done with tax reporting.
If long-term trading might be your thing, consider getting a secure and air-gapped cold wallet.