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Understanding Tax On Cryptocurrency

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tax on cryptocurrency

Filing Tax On Cryptocurrency is not the most interesting part of crypto, as it is considered complicated and many taxpayers find it difficult to navigate through the waters- thanks to the IRS and SEC that keep bringing up new regulations in terms of taxes.

This article presents to you all the aspects of tax on cryptocurrency and all the important details that you need to know regarding filing and reporting taxes.

Crypto Tax Rates In 2021

As per the rules laid down by the Internal Revenue Service, the amount of tax that you’ll be subjected to depends on your income, filing status as well as the holding period.

When the holding period of your crypto assets is fewer than a year or 365 days, you pay short-term capital gains tax. On the other hand, when the holding period of your crypto assets is longer than a year, you pay long-term capital gains tax.

Take a look at the next section where we’ve tabulated the different tax rates for both short-term and long-term capital gains.

Short Term Capital Gains Tax

As of 2021, the tax rate for short-term capital gains ranges from 10% to 37%. The tax rates for short-term capital gains are as follows:

Tax Rate Tax Filing Status
Single Married Filing Jointly Head of the House
10% $0-$9,950 $0-$19,900 $0-$14,200
12% $9,951-$40,525 $19,901-$81,050 $14,201-$54,200
22% $40,526-$86,375 $81,051-$172,750 $54,201-$86,350
24% $86,376-$164,925 $172,751-$329,850 $86,351-$164,900
32% $164,926-$209,425 $329,851-$418,850 $164,901-$209,400
35% $209,426-$523,600 $418,851-$628,300 $209,401-$523,600
37% >$523,600 >$628,300 >$523,600

Long Term Capital Gains Tax

In 2021, the rate of tax for long-term capital gains tax varies between 0% to 20%. The tax rates for long-term capital gains are as follows:

Tax Rate Tax Filing Status
Single Married Filing Jointly Head of the House
0% $0-$40,400 $0-$80,800 $0-$54,100
15% $40,401-$445,850 $80,801-$501,600 $54,101-$473,750
20% >$445,850 >$501,600 >$473,750

Taxable Events

Taxable events can be of two types:

  1. Capital gains tax
  2. Income tax

If you spend or use your cryptocurrency in any manner and its value has grown since you initially purchased it, you owe crypto taxes. The following are the many categories of taxable events associated with bitcoin transactions:

  • Cash-out crypto for fiat currency
  • Buying products or services with crypto
  • Crypto trades

Only if the value of your cryptocurrency has increased, this is considered a taxable event. The cost basis, or the whole amount you paid to obtain your crypto, is required to assess if you owe crypto taxes. Then you compare it to the price at which you sold the crypto or the amount you received when you utilized it.

Assume that some years back you had bought some BTC for $10,000. The following are some instances of taxable events:

  • You’d report $15,000 in profits if you sold the bitcoin that you had for $25,000
  • You’d report $5,000 in profits if you used your share of Bitcoin for buying goods worth $15,000
  • You’d report $15,000 in profits if you trade your bitcoin for $30,000 in another cryptocurrency.

But what about income taxable events?

Cryptocurrency income is taxed like regular income at its fair market value on the day it is acquired by the taxpayer. Here are some of the most popular examples of crypto income events:

  • Receiving cryptocurrency as payment for a service
  • Receiving interest payments when lending crypto
  • Earning bonuses and rewards through mining cryptocurrency
  • Earning benefits via staking cryptocurrency

Reporting Crypto Tax

Now coming to one of the most important aspects of understanding tax on cryptocurrency- that is reporting the taxes.

Form 8949 is used to declare cryptocurrency profits and losses and some information is required to fill it out:

  1. Name of the crypto, such as Bitcoin, Etereum, Ripple, etc.
  2. Date of acquiring and cost basis
  3. Selling, exchanging or disposing of date
  4. Gains or the selling price
  5. Profit or loss in total

The Bottom Line

The dramatic fluctuations of the crypto market and the increased regulation by authorities like the Internal Revenue Service and the Securities and Exchange Commission have been making cryptocurrency, and crypto taxes a rather complicated procedure.

Fortunately, you can take the help of crypto tax software such as ZenLedger to assist you with filing your bitcoin taxes with ease.

ZenLedger easily calculates your bitcoin taxes and also finds opportunities for you to save money and trade smarter. Get started for free now or learn more about our tax professional prepared plans!

Disclaimer: This material has been prepared for informational purposes only and is not intended to provide tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

FAQs

  1. How to report Bitcoin on taxes?

Depending on the type of transaction you make, the type of revenue—ordinary income or capital gain—should be stated under the relevant title in the associated columns of the form. You may take the help of tools like Coinbase and ZenLedger instead of doing everything manually and to avoid making errors.

  1. How can I avoid paying taxes on Crypto?

Buying cryptocurrencies in an IRA, 401(k), defined benefit, or other retirement plan is one of the best options to delay or eliminate tax on your cryptocurrency assets. Another option to pay no tax on cryptocurrency earnings is to gift or donate crypto assets.

  1. Does Coinbase report to the IRS?

Yes, Coinbase delivers two copies of Form 1099-MISC. One of them is sent to the qualifying user who has received more than $600 as crypto awards or staking, and the other copy goes to the Internal Revenue Service.

 

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