Cryptocurrencies and Taxes: What you should know

Cryptocurrencies such as Bitcoin and Ethereum are subject to capital gains tax rules, whether good or bad. All cryptocurrency is treated by the Internal Revenue Service (IRS) as capital assets, and when you sell them at a profit, you have to pay taxes on the gains. You can experience the same thing when you sell more traditional investments, such as stocks or funds, at a profit.

In order to calculate how much capital gains tax you own, you have to consider whether you have held your cryptocurrency for more than one year or less than one year. Until you reach 12 months, your profits are taxed at your regular income tax rate, also called short-term capital gains tax. After one year, if your taxable income is lower than your capital gains rate, you may qualify for the long-term capital gains rate.

Similarly, if you sell your crypto investment at a loss, you are eligible to claim a capital loss to offset other income taxes, just as you would if you sold another investment at a loss.

There are, however, some additional wrinkles to cryptocurrency taxes.

You are selling your cryptocurrency when you purchase goods or services with it. Your coins will be subject to capital gains taxes if their value has increased over the price you paid originally. Additionally, you will be responsible for any applicable sales taxes.

Your regular taxable income includes cryptocurrency earnings from mining, promotions, or payments for goods or services. Upon receiving the crypto, you are liable for tax on the entire fair market value at your regular income tax rate.

It is also possible to owe capital gains taxes on the profit that you earn from selling a cryptocurrency that you mined or earned.

Cryptocurrency & NFT taxes can be complicated to calculate and file. Taxes on cryptos should be filed for the following reasons:

There is some confusion regarding cryptocurrency taxation among some crypto users. In order to avoid compliance, they use this excuse. We regret to inform you that this is not true.

The IRS considers digital currencies like bitcoin to be property (capital assets). Capital gains tax applies to capital assets. It has been decades since capital gains taxes were introduced, well before bitcoin was invented. Further, the IRS explicitly stated in 2014 that crypto should be taxed according to all general property laws. However, there are some unique situations where legacy tax law and existing generic guidance aren't directly applicable. Most cryptocurrency users can file their taxes properly with the guidance already available.

It is illegal for the IRS to audit your tax returns if the statute of limitations has expired. Tax returns trigger a stopwatch that counts down the days until the IRS can audit you. Tax returns are generally auditable three years after they are filed. 

However, there are two exceptions to the three-year rule. If your gross income has been understated by more than 25%, you have six years to file your claim. Furthermore, the statute of limitations does not start if you do not file a tax return, which means that the IRS can pursue you indefinitely.

The three-year stopwatch starts when you file your tax return, so it is vital to file an accurate return in order to avoid an audit. You should always file something rather than nothing. Filing your taxes on time will prevent the IRS from auditing you indefinitely!

Crypto trading losses can be deducted under the tax code. Net capital losses can be deducted by hobbyist investors every year up to $3,000 of income. If your net capital losses exceed this amount, you can carry forward the remainder indefinitely to future tax years. Taking forward losses can be used to offset capital gains in the coming years. You could even receive a larger tax refund due to these losses.

The following tips can help you minimize cryptocurrency taxes in the future:

Your gains from a crypto investment are eligible for the preferential long-term capital gains rate if you hold it for at least one year before selling it. The maximum tax rate for short-term gains goes from 37% to just 20%, depending on your taxable income for the year.

When you realize your crypto profits, you can also claim losses on other investments you made in the same year. You would not owe any tax if you made $10,000 from Bitcoin sales but lost $10,000 from Ethereum sales.

Other types of cryptocurrency aren't immune to these losses, either. Consider selling other losing investments in your portfolio if you are about to cash out a significant crypto investment. Moreover, suppose you have losses that exceed your gains in any year. In that case, you can deduct up to $3,000 in the excess losses from your personal income taxes, owing to the fact that you can carry forward the unused losses and use them to offset future investments.

You can always wait for a lower tax rate if you have time on your side, according to Jeff Hoopes, research director of UNC's Tax Center and associate professor at UNC.

There are many reasons why you might have been laid off, retired, gone back to school, or moved to a state that has lower taxes. In this case, you would be in a lower tax bracket, allowing you to sell your crypto for a lower tax amount.

The mining of cryptocurrency might appear inexpensive, but it requires significant expenses, such as computers, servers, electricity, and internet service provider fees. Those costs can be deducted from mining income if you are a crypto miner. You can remove the number of your operation's expenses or assets based on whether you categorize it as a business or a hobby.

Crypto investments can reduce your tax burden if you donate at least some of your profits to charity if you don't need all of the profit. You can deduct your total cryptocurrency value, including any gains. You would only benefit from this if you were already planning on donating to charity.

Filing your Crypto taxes

Launched in 2017, Cointracker has become the best platform to help with filing cryptocurrency taxes. They will automatically generate the IRS forms you need, that you can send straight to your accountant. All you have to do is connect your exchange accounts, import wallets or upload a CSV of all your transactions. You can get started for free here.