A common question from new cryptocurrency investors is: do you pay taxes on crypto?
The short answer is yes; you need to pay cryptocurrency taxes. While the details of how and how much depend on your country and what kind of crypto you hold, most governments require you to report gains and losses on your tax returns.
Cryptocurrencies have only been around for just over a decade and have only reached a minimum level of mainstream popularity in the last five or so. Especially in the early years, this new asset class leaves investors with many open questions.
Let’s look at this and a few more commonly asked questions involving crypto taxes.
How Do I Know If I Owe Crypto Taxes?
If you’ve got cryptocurrency, there’s a good chance you’ll need to include it on your tax return. Whether or not you owe something depends on the magnitude of your gains.
The Internal Revenue Service (IRS) has clarified that it considers cryptocurrency property, not currency. Gains from buying, selling, or trading cryptocurrencies like Bitcoin and Ethereum will be taxed.
Here are some basic guidelines to help you know if you owe crypto taxes.
Do I need to pay taxes on cryptocurrency? If you are a U.S. citizen or resident and have taxable income from cryptocurrency transactions, then yes — you need to report (and probably pay taxes on) your gains to the IRS.
To which kinds of transactions does the tax apply? All taxable events for cryptocurrency transactions are subject to capital gains tax. They include:
- Buying or selling cryptocurrencies for fiat currency (like dollars or euros)
- Trading one cryptocurrency for another
- Using crypto to pay for goods and services
- Mining cryptocurrency
Long- or short-term capital gains are profits from selling an asset at a higher price than what was paid. Depending on your income bracket, ordinary rates ranging from 10% to 37% apply for short-term capital gains, while rates are lower for long-term capital gains, typically 0% – 20%.
When Do I Need to Report Crypto Trades on My Tax Return?
The mere purchase of cryptocurrency doesn’t create a taxable event. Instead, you need only to report to the IRS when you sell cryptocurrency for a profit.
You will also need to report any income from selling NFTs on Form 1040 Schedule D, which is a part of your income tax return. In addition, if you are selling an NFT that you created yourself, you should use Form 8949 instead of Schedule D because it has more information about the creation and sale.
Traders should report cryptocurrencies as a business activity. Even trading for fun can lead to profits and create events you should report to the IRS.
Do I Have to Pay Capital Gain on Crypto?
Yes, everyone is required to pay capital gains tax on their crypto transactions.
There are two core types of crypto transactions:
Income from Mining: Mining is when you use your computer or a dedicated mining machine to earn cryptocurrency rewards by solving complex mathematical problems. Mining income is treated similarly to self-employment income and is subject to self-employment tax.
Transfers of Cryptocurrencies: Any transfer of cryptocurrency between wallets, exchanges, etc., is considered a taxable event and subject to capital gains tax.
In addition, profit from cryptocurrency held for more than a year is considered a long-term capital gain. If you hold cryptocurrency for less than a year, the profits are regarded as a short-term capital gain and taxed at higher rates.
Is There Software to Help me Calculate My Crypto Taxes?
Absolutely. Many crypto users look for software to aid in calculating crypto taxes. Software solutions are a great idea because they can save you time and money (and stress) while ensuring accuracy.
But there are other reasons why using software is essential:
Correctly reporting your gains is critical. Errors can lead to penalties, interest, and even criminal charges if the IRS finds out that you didn’t report your gains correctly.
The IRS has been cracking down on investors not reporting their crypto gains, and they have access to more information than ever. If you don’t report properly, chances are good that they will find out.
Although there are many software options available to help calculate your crypto taxes, here are some of the most popular:
Do You Pay Taxes on Crypto? Yes, and Founder’s Can Help
You must report crypto holdings and profits on your tax returns in most countries.
For U.S. citizens and residents, that means paying taxes on cryptocurrency gains (netted with your losses). But you don’t get off scot-free as a non – U.S. citizen or resident — your country likely has its own rules regarding cryptocurrency taxes.
Fortunately, Founder’s can help! We’re experts in crypto tax preparation and reporting for individuals, businesses, and startups. We know how to track and report cryptocurrency gains and losses properly on your tax return so you can survive an IRS audit!
Contact us today and let us handle your crypto taxes.
November 22, 2023