The cryptocurrency market, with Bitcoin (BTC) and Ethereum (ETH) at the forefront, sees massive daily trading volumes, prompting 24/7 activity across major exchanges. To avoid legal issues, it’s crucial for traders, companies, and enthusiasts to understand and comply with tax regulations, as the IRS can impose severe penalties for tax evasion.
Cryptocurrencies are treated as taxable property by government agencies, and their transactions, including airdrops, are subject to taxation. Tax forms and reports must be carefully completed, for which hiring a tax professional can be beneficial. Capital gains, cost basis, tax lots, and the current tax rate are key factors affecting the amount of taxes owed.
Taxable events include trading, selling, or using cryptocurrencies for purchases, as well as receiving them through mining or hard forks. Bitcoin tax calculators and cryptocurrency tax software can simplify tax calculations by integrating data from wallets and exchanges, while tax preparation software like TurboTax and TaxAct ensures accurate filing.
Ultimately, understanding and correctly handling crypto taxes are essential to avoid penalties and remain compliant with the law. Using professional tools and services is recommended to ensure accuracy and peace of mind during tax season.
The cryptocurrency market has reached a multimillion-US dollar daily trading volume worldwide. Bitcoin (BTC) and Ethereum (ETH), as the most popular cryptocurrencies on the market, account for the largest amount of these trades. The biggest cryptocurrency exchange platforms such as Coinbase, Binance, and Kraken, consistently show enormous trading volumes, especially when it comes to BTC.
Professional brokers, startups, companies, and crypto enthusiasts are all trading Bitcoin constantly, 24/7, since crypto exchanges work all the time, which means that huge amounts of money are changing hands.
Naturally, as is the order of things, government agencies and state financial institutions also take an interest in all these transactions, which means regular taxation of your crypto income. Since tax evasion is a serious crime in every country, especially in the US, with serious fines and prison terms as potential punishments, you should get to know all the factors that contribute to the taxes you have to pay on your cryptos. It is better to be a regular taxpayer than to risk legal repercussions.
Let’s take a look at what cryptocurrency taxes are, how they work, how you can calculate your taxes, and what the contributing factors to your annual taxes are.
Cryptocurrencies may not exist physically beyond their blockchains and crypto wallets, but they are treated as taxable goods by government agencies, paid in fiat currency. You should take into account several factors and tax rules when deciding on how to pay your taxes, since it is a complex process.
IRS and Crypto Taxes
The Internal Revenue Service (IRS) is known to crack down hard on all entities that evade paying taxes, regardless of whether they are individual brokers, entrepreneurs, or companies. In the US, cryptocurrency is treated as property for tax purposes, which means it can be seized the same way as fiat money, real estate, and other taxable property if you fail to fulfill your legal tax obligations.
If you don’t pay your taxes, the IRS will confiscate and sell your cryptos at an auction, so it is far better to learn all about the amount of taxes you have to pay in order to comply with tax laws.
Cryptocurrency airdrops are a tactic employed by various crypto development teams, and it basically means giving some crypto to traders for free or for a symbolic fee in order to popularize a certain coin or token.
Airdrops aren’t usually of any high value, but over time, if a cryptocurrency that was airdropped to your wallet becomes popular, the value of your airdrop might increase significantly.
The IRS has classified cryptos from airdrops as taxable property, so pay attention to cryptos from such a source when filing taxes.
When filing taxes, you will be dealing with various tax forms; they are complex documents which need to be carefully filled out with accurate information. You can find all the necessary forms, along with instructions on how to fill them, on the IRS website for the US, or on the website of your designated government institution in other countries. There are also numerous tutorial videos and guides on how to properly fill out these forms in case you get confused.
Taxes are something you want to get right every time you are filing them out, and here is where tax professionals play an important role. Hiring a tax professional to check your tax liability and documentation is really worth the fee, since it is better to know you have filled everything correctly, than to get fined by the state for not filing your taxes as you should. There are different accounting methods such as FIFO and LIFO which are complex processes of structuring financial records, and this is something you definitely want a professional to handle.
When you are finally sure that everything is filed as prescribed by law, you are ready to submit your tax report and pay your taxes. You should ensure to keep all the records of your tax filing reports archived, so that you’re on the safe side in the event of an audit by a government agency (especially if you have a company or startup).
Factors That Define Tax Amount
Now, we’ll take a look at factors that contribute to the amount of taxes you have to pay on your cryptos.
Cryptocurrency capital gains greatly contribute to the amount of taxes you have to pay. Gains on your crypto assets are not realized before you exchange your cryptos for another currency, sell them, or spend them.
Buying cryptos isn’t subject to capital gains under taxation rules.
When you simply buy a certain amount of virtual currency like BTC, you haven’t gained capital assets, unless you made profits by selling your BTC for a higher price than the one you bought it for by exchanging it for another cryptocurrency or cashing out your coins into fiat money.
Also, if you have been holding onto some cryptos for a longer period of time and their value has risen, you are subject to capital gains taxes depending on the time you held those assets and the change in their value. Short-term capital gains usually have different tax rates than long-term capital gains.
Paying attention to all of your crypto capital gains is of particular importance when filing taxes, since this factor is the key contributor to the amount of taxes you will have to pay.
The cost basis of your crypto assets is another important factor when calculating taxes. The amount you paid for your cryptos when you bought them, in fiat money such as USD, adjusted for any related costs, is your cost basis. Related costs are transaction fees or exchange platform fees associated with the buying of a certain amount of cryptos. If the purchase price for 1 BTC was 50,000 USD, including fees, then your cost basis for this coin is 50,000 USD.
Crypto tax lots are basically data about your crypto trading and investment history. These lots contain the cost basis of your cryptos, the exact amount of time you were holding them, and the price you sold your cryptos for or traded them for another currency. If you use crypto tax software, all of this information can be handled automatically by connecting the software to your wallets and exchange accounts.
The current crypto tax rate is one of the single most important parameters when filing taxes. This tax rate can be subject to change by the government, so it is best to consult a tax professional for the exact information concerning the tax rate you should pay attention to.
This is the list of the most common taxable income events related to cryptocurrency.
- Trading and exchanging cryptocurrency: When you exchange or trade one asset, such as BTC for LTC, this is a taxable event because of the possible gains from the trade. All sorts of cryptocurrency transactions are subject to taxes.
- Selling cryptocurrency: All sales of cryptos are subject to taxation because of the profits gained from this action. The applied tax rate can be a short or long-term tax.
- Purchasing services and goods: Every purchase of services or products online with cryptocurrency is subject to taxation.
- Mining cryptocurrency: All of your mined cryptocurrencies will be taxed once you sell them or exchange them. The mining process itself can’t be taxed, but any type of trade or exchange you do with the cryptos you have mined is subject to taxation.
- Cryptos from hard forks: All cryptos that you receive as a result of a hard fork of a blockchain of a certain crypto are taxed once you exchange or sell them.
Receiving payments in cryptocurrency: Payments you receive in cryptocurrency are subject to taxation.
Calculating Your Taxes
In order to be sure how much money you actually have to pay for cryptocurrency taxes and what tax bracket you fall in, you need to precisely take into account all of the factors we mentioned in previous sections, and this can often get pretty confusing. Sometimes, no matter how carefully you try to calculate your crypto taxes, you can make a mistake just because you forgot to include a couple of digits or tax slots, which can cause you a major problem with your state tax agency.
If you have thorough experience with accounting methods and know your way around all the legal aspects of tax laws in your state, then you can attempt to calculate your taxes personally and manually. However, this requires a professional approach to tax calculation, which isn’t really common among crypto enthusiasts.
In order to avoid any unpleasant surprises from the government, and to be sure you have paid all your taxes – especially if you are investing large volumes of money in cryptos – it is advisable to use professional software solutions to calculate your taxes and submit your tax reports.
Bitcoin Tax Calculator
Bitcoin tax calculators are specialized software solutions that enable users to precisely calculate the amount of taxes they have to pay, depending on their BTC-related activities. These programs will save you a lot of headaches by helping you calculate your BTC taxes.
Crypto Trader Tax is one of the most popular cryptocurrency tax calculator platforms on the web. It provides users with an extremely user-friendly app which can be connected to all of their exchange platform accounts to seamlessly pull all the necessary transaction history data needed to get an accurate overview of the user’s tax slots. This enables the app to provide accurate feedback for the precise filing of cryptocurrency tax reports. It also comes with integrated support for TurboTax and TaxAct tax preparation and filing softwares.
CryptoTax calculator is another example of a highly efficient and user-friendly crypto tax software that supports hundreds of crypto exchange platforms, crypto wallets, and other data sources, seamlessly integrating data in order to calculate your taxes accurately.
Tax software or tax preparation software are programs that are specifically created for tax reporting. It is highly advisable to combine tax return software with cryptocurrency tax calculators. The tax calculators we have listed are equipped with integration options for the most popular tax software programs.
TurboTax is one of the most trustworthy tax preparation software that is suitable for filing American income tax reports. The platform comes with numerous options depending on whether you want to file taxes as an individual or if you are an entrepreneur with your own company. TurboTax has a free basic version and an upgraded paid version for advanced corporate users. Using such software for filing taxes is a sure way to get everything right and pay your taxes according to the law.
TaxAct is another highly popular tax software that enables users to file their tax reports electronically. It also offers both a free and a premium (paid) edition that comes with more options, but the free edition by itself has lots of features that are sufficient for individuals filing taxes. All of your data is checked by professionals before it is submitted to the relevant taxing authorities.
A Few Words Before You Go…
Paying taxes for crypto assets is as real today as paying taxes on any other assets or property. Just because digital currencies don’t exist physically doesn’t mean they aren’t subject to taxes, and this is why you need to know all the basics on crypto taxes – so you can resolve your legal obligations in a timely manner, without unpleasant surprises.