It’s hard to imagine how many new crypto users entered the asset class in 2021. It was a record-breaking year for most cryptocurrencies, and the rapid popularity of NFTs propelled the entire sector to new heights.
As incredible as 2021 was, tax season is approaching, and it’s essential to understand how your crypto activities from last year will impact your taxes. Whether you received a massive airdrop or sold your long-time holdings for a phenomenal profit, you’ll need to pay taxes on your gains.
The general advice is that all crypto transactions are taxed as a capital gain or loss, but it’s a bit more complicated than that. It’s time to explore the world of crypto taxes so that you’re prepared to report your crypto activities properly.
Note: Every country has its laws regarding cryptocurrency taxes, but most countries have the same general guidelines. We base this article on the U.S. Internal Revenue Service guidelines for cryptocurrencies. Research the exact laws in your country to properly file your taxes. Additionally, nothing in this article is legal advice.
Taxable vs Non-Taxable Cryptocurrency Transactions
Do you owe taxes on your cryptocurrency transactions? Cryptocurrency is typically treated the same as stocks, bonds, or other similar assets, but that’s not true in every situation.
Cryptocurrency has the unique function of being used as a currency, meaning it might be taxed as income in some situations.
You also need to know what types of transactions aren’t taxed. So, let’s clarify the different types of transactions and how they’re treated by the IRS.
Taxable Transactions
Taxable crypto transactions can fall into two categories: income or capital gains/losses. Each category is taxed differently, so you need to understand the types of transactions that fall into these categories.
Taxable as capital gains:
- Selling crypto for a fiat currency: Any cryptocurrency sold for a fiat currency, such as USD or EUR, is taxed as capital gains or loss, depending on the value in relation to when it was purchased. A capital loss can help offset gains from other capital gains, such as stocks.
- Converting one crypto to another: Buying one cryptocurrency with another one is considered the same as selling the crypto for fiat. So, for example, the IRS considers the process the same as selling your Bitcoin for USD, then buying Ethereum with USD, even if that’s not exactly how it works.
- Spending crypto on goods or services: Did you buy a Tesla with Dogecoin? The IRS treats it the same as selling your Dogecoin for USD, then buying the Tesla with USD. That means it’s taxed as capital gains.
Taxable as income:
- Mining crypto: Any crypto received from mining is taxed as income based on the current market value of the coins when they were received. Own a mining business? It’s taxed as self-employment income.
- Receiving crypto for goods or services: Plenty of online stores have started accepting popular cryptocurrencies, and they’ll be paying taxes on those transactions as income.
- Getting paid in crypto: Are you receiving your ordinary income in crypto instead of a fiat currency? Unfortunately, you still need to pay taxes on it.
- Staking rewards: Many different types of cryptocurrencies provide staking rewards. These rewards are considered income.
- Earnings from a hard fork: Hard forks generally copy your current assets to the new chain. Those new assets are generally taxed as income, depending on how they were used.
- Receiving crypto from airdrops: Airdrops have become increasingly common as crypto projects use them to build interest in their projects. If you received an airdrop, it’s considered income.
- Other incentives or rewards: The crypto world seems to always come up with new ways to reward people, so this list is not exhaustive. Any other crypto earned from rewards or incentives is considered income.
Non-Taxable Transactions
We already covered most cryptocurrency transactions, but not all of them. There are plenty of transactions that you won’t have to pay taxes on:
- Buy crypto and hold it: You’re only taxed when you sell crypto. So buying crypto is not taxable by itself.
- Donating crypto is tax-exempt: A ton of non-profit (501(c)(3)) organizations have started to accept crypto donations. If you gave to any of them, you can likely claim a charitable deduction.
- Receiving or giving a gift: Simply receiving a gift is not taxable, but what you do afterwards might be (selling, staking, etc.). Giving a gift is also not a taxable transaction, provided it’s under $15,000 per recipient.
- Sending crypto between wallets: Sending crypto from one wallet to another is not a taxable transaction.
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A Primer on Calculating Your Crypto Taxes
So, how do you calculate your crypto taxes? As you saw from the lists above, you’ll need to pour over your crypto transactions to help calculate each transaction depending on its category.
Let’s revisit the two taxable transaction categories:
Understanding Crypto Income:
Any crypto that’s taxable as income is treated the same way as if you were paid in fiat currency. For U.S. taxpayers, that means considering both state and federal tax rates. Your crypto income probably didn’t include any withholding, as a regular paycheck does, so you’ll need to calculate those rates. Be aware that crypto income may push you into a new tax bracket.
Understanding Crypto Capital Gains:
You’ll need to begin by understanding your cost basis, which is the market value of the crypto when you purchased it. Then, you subtract the cost basis from the sales price when you sell it. After that, gains are taxed; otherwise, it’s a capital loss. Capital gains are further separated into short-term and long-term investments:
- Short-term gains: These types of gains are generally taxed the same as income, which is typically less favorable than long-term gains
- Long-term gains: The capital gains rate varies based on your income level; it can range from 0-20%. You must’ve held the crypto for more than a year to consider its long-term gains.
What about capital losses? You’re not always selling for a profit, so capital losses can be used to offset capital gains, potentially reducing your tax bill.
Crypto Tax Laws May Be New, But You Still Need to Follow Them
Follow the guidance provided by the tax agency in your own country to guarantee that you adhere to its guidelines. Failing to do so can have serious consequences – it’s well worth the time and money to pay your crypto taxes.
Coinmotion makes it easy to invest in cryptocurrencies, and part of that means keeping helpful logs of every transaction. Then, when it’s time to pay taxes, our records will be there to help.
Get started investing with Coinmotion today to safely and securely capitalize on the emerging asset class.
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