Crypto Investing: Taxes And You

The world of cryptocurrency taxes is a complicated one. The IRS treats all cryptocurrencies as capital assets, which means that any profits or income from your cryptocurrency are taxable. The type of taxes you pay and how much depends on the circumstances in which you acquired and used your cryptocurrency, your income, and your tax status. For example, if you sell cryptocurrency for a profit, you're taxed on the difference between your purchase price and the proceeds of the sale. This also includes exchanging your cryptocurrency directly for another cryptocurrency, and using it to pay for goods or services.

Capital gains taxes on profits from selling crypto

Capital Gains Taxes on Crypto Profits

When you sell cryptocurrency and make a profit, you generally need to pay capital gains taxes on that profit. The amount of tax you pay depends on how long you owned the crypto before selling it and your annual income. The IRS categorizes cryptocurrencies as property, so selling crypto is similar to selling stocks or other assets for tax purposes.

Short-Term Capital Gains Tax

If you sell crypto that you've owned for a year or less, you'll pay the short-term capital gains tax rate. This rate is typically higher than the long-term capital gains tax rate. Any profits from short-term gains are added to your taxable income for the year, and you pay taxes on the total amount. The short-term capital gains tax rates for 2024 range from 10% to 37%.

Long-Term Capital Gains Tax

On the other hand, if you sell crypto after owning it for more than a year, you'll pay the long-term capital gains tax. This tax has its own set of rates, which are generally lower than the short-term rates. Depending on your income and filing status, you'll typically pay 0%, 15%, or 20% on your long-term gains.

Calculating Capital Gains

To calculate your capital gains or losses, you need to know your cost basis, which is the amount you paid for the crypto. When you sell, subtract your cost basis from the sale price to determine your gain or loss. If the sale price is higher, you have a capital gain; if it's lower, you have a capital loss.

Reporting Capital Gains and Losses

When reporting your taxes, you'll need to include information about your capital gains and losses on IRS Form 8949, Sales and Dispositions of Capital Assets. Additionally, you'll summarize this information on Form 1040, along with capital gains from any other investments.

Losses and Tax Benefits

It's important to note that if you sell crypto for a loss, you can use those losses to offset gains made in other transactions. This can help reduce your overall tax liability. If your losses exceed your gains, you may be able to deduct a maximum of $3,000 from your taxable income, and you can carry over any remaining losses to future tax years.

Crypto is taxed as property, not currency

In the US, the Internal Revenue Service (IRS) treats cryptocurrencies as property, not currency, for tax purposes. This means that the general tax principles that apply to property transactions also apply to transactions using virtual currencies.

The tax implications of this classification are as follows:

• If you sell or use your cryptocurrency in a transaction and it is worth more than when you bought it, you will owe taxes on the resulting capital gains. This is because you have triggered a taxable event by realising a gain.
• If you receive cryptocurrency as payment for business purposes, it is taxed as business income.
• If you successfully mine a cryptocurrency or are awarded it for work done on a blockchain, it is taxed as ordinary income.
• If you exchange your cryptocurrency for another cryptocurrency, you will need to report any gains or losses, as this is treated as converting one to fiat and then purchasing another.
• If you spend your cryptocurrency, the IRS views this as similar to selling it. You will need to report any capital gains or losses, and you may also need to pay sales tax.

In Canada, the Canada Revenue Agency (CRA) does not explicitly state that cryptocurrencies are taxed as property, but it does refer to the disposition of crypto-assets, which can result in business income or a capital gain. The CRA also states that using cryptocurrency as payment for goods or services is treated as a barter transaction for income tax purposes.

Crypto mining and staking are taxable

Cryptocurrency mining and staking are taxable activities in most countries. The tax treatment of income from mining and staking differs from that of cryptocurrency received in trade. While trading profits are taxed as capital gains, mining and staking rewards are generally taxed as ordinary income. This means that you will owe tax on the entire value of the crypto on the day you received it, at your regular income tax rate.

In the US, the Internal Revenue Service (IRS) considers any profits or income from cryptocurrency taxable. If you are a cryptocurrency miner, the value of your crypto at the time it was mined counts as income. This income is taxed as ordinary income unless the mining is part of a business enterprise, in which case it is taxed as business income. Additionally, if you are awarded crypto for work done on a blockchain, it is also taxed as ordinary income.

Crypto mining tax rules differ between hobbyists and businesses. If you are mining as a hobby, you will report the value of the currency earned as "Other Income" on your tax return. On the other hand, if you run a mining operation as a business, you will report your earnings on a Schedule C and will be subject to self-employment tax. As a business, you may also be able to deduct certain expenses, such as computer equipment and other necessary costs.

It is important to note that selling or trading the cryptocurrency that you mined will be realized as a capital gain or loss on that asset, and you will need to report this on your tax return.

Similar to the US, Canada also taxes cryptocurrency mining and staking activities. In Canada, the Canada Revenue Agency (CRA) treats income from disposing of cryptocurrency as business income or a capital gain, depending on the nature of the transaction. If you are in the business of crypto-asset mining, the value of the crypto you receive must be included in your business income. Additionally, if you own crypto-asset mining equipment, you may be able to claim a deduction for capital cost allowance.

Crypto losses can be used to offset gains

Crypto investors can use their losses to offset their capital gains taxes and lower their tax liability. This strategy is known as crypto tax-loss harvesting. It involves selling an asset at a loss during a market low or at the end of a tax year. The loss can then be used to offset capital gains from other assets or to offset future gains from the same or other profitable investments.

In the US, investors can sell an unlimited number of assets and deduct up to $3,000 to offset ordinary income on their federal taxes. Any further losses can be carried forward into future tax years. For married couples filing separately, the limit is $1,500.

The IRS may classify a sale as long-term if the asset is held for one year or longer, and such long-term capital gains receive favourable tax rates. If the asset is held for less than a year, it is considered short-term, and the investor will pay ordinary income tax rates.

When calculating crypto gains and losses, the process is simple: it is the difference between the buying and selling price of the coins. However, crypto exchanges are not required to keep track of this information, so it is up to the investor to record these details. There are crypto tax programs that can assist with this, and even generate copies of the relevant tax forms.

It is important to note that merely holding cryptocurrency at a loss does not result in a taxable event. To declare a capital loss, the investor must engage in a taxable event, such as selling for fiat currency, exchanging for another cryptocurrency, or using the crypto to purchase goods or services.

Crypto tax software can help with record-keeping

Crypto tax software is a valuable tool for investors to keep track of their transactions and navigate the complexities of cryptocurrency taxation. This software simplifies the process of calculating and filing crypto tax returns, saving time and effort for investors. Here's how crypto tax software can help with record-keeping:

• Automated Data Synchronization: Crypto tax software allows users to integrate their crypto wallets and exchange accounts, automatically pulling transaction data and history. This eliminates the need for manual data entry, ensuring accuracy and saving time.
• Capital Gains and Losses Calculation: One of the most important aspects of crypto taxation is calculating capital gains and losses. Crypto tax software performs these calculations automatically, using transaction data to determine the profit or loss for each transaction. This helps investors understand their tax liabilities.
• Tax Form Generation: After analyzing transaction data, crypto tax software generates tax forms that can be downloaded and used for filing taxes. This simplifies the process of reporting crypto gains and losses to tax authorities.
• Support for Multiple Exchanges and Wallets: Crypto tax software supports a wide range of crypto exchanges and wallets, allowing users to track their investments across various platforms. This ensures that investors can consolidate their transaction data in one place, even if they use multiple exchanges or wallets.
• Real-time Portfolio Tracking: By syncing with exchanges and wallets, crypto tax software provides users with real-time information about their portfolio's performance and allocations. This helps investors make informed decisions and manage their tax liability.
• Tax Expert Assistance: Some crypto tax software platforms offer access to tax experts who can provide guidance and advice. These professionals can assist with completing tax returns, ensuring compliance with tax regulations, and optimizing tax strategies.
• Tutorials and FAQs: Crypto tax software often includes tutorials and frequently asked questions (FAQs) sections, providing users with the information they need to navigate the software and understand the basics of crypto taxation.
• Long-term Record-Keeping: Crypto tax software enables users to maintain records for multiple years, which is essential for long-term crypto investors. This helps investors meet record-keeping requirements and ensures they have the necessary data for calculating capital gains when they eventually sell their assets.
• Security and Data Protection: Reputable crypto tax software providers prioritize data security, employing measures such as SSL encryption and two-factor authentication to protect user information. This ensures that sensitive financial data remains secure.
• Integration with Traditional Tax Software: Some crypto tax software can integrate with traditional tax software, such as TurboTax, allowing users to seamlessly import their crypto tax information into their overall tax returns. This streamlines the tax filing process and ensures consistency.

Crypto tax software simplifies the process of tracking and reporting crypto-related transactions, helping investors stay compliant with tax regulations. By automating data synchronization, calculating capital gains and losses, and generating tax forms, these tools reduce the burden of record-keeping for crypto investors.

Frequently asked questions