Paying taxes for Crypto Gains
Paying taxes for crypto gains is the most recommended move. Don’t evade taxes. You might be trading on an exchange that doesn’t report to the IRS or you might want to take advantage of the lack of regulation in the space. As the market cap of crypto increases, be sure that the IRS is going to find out how to get their slice. And they will look into the past.
I am not a tax advisor. This is a simple overview of what I keep in mind as I trade. My accountant handles my taxes, and I advise you to get an accountant to do the same. Keep in mind that this is US-centric. You need to double check if this is the case in your country.
The taxable event is when you sell your cryptocurrency for fiat. In my case, it is when I sell BTC for USD. How much tax you pay depends on how long you were holding the cryptocurrency. This is important to know when paying taxes for crypto gains. Learn more about STS Crypto HERE.
Crypto that you hold for less than a year
Let’s split this into 3 transaction types.
Sell crypto for fiat – pay ordinary income tax. When I sell Bitcoin for USD, I am taxed using the FIFO (first in, first out) method of accounting. For example, if I buy BTC with an initial investment of $1,000 and a week sell the BTC for $1800, I’ll pay taxes on the $800 profit. Start trading today – Open a free account.
Buy crypto with crypto – unclear, but does not seem to be a taxable event. This is where things get foggy. Consult your advisor, but as far as I know this is a like-kind exchange which is not taxable but must be reported to the IRS. The exchange you use will output all of these transactions so you can hand them to your accountant.
Update: The IRS has clarified that a crypto to crypto exchange is not a like-kind exchange. The profit made from each transaction is taxed. More info here.
Crypto that you hold for more than a year
If you are holding a currency for more than a year it is classified as long term capital gains. Once you sell your Bitcoin or Altcoin for USD, you’ll be taxed at a rate of 15%.
This is another reason why I like keeping my net worth in Bitcoin. If I hold it for more than a year I only need to pay 15% tax whenever I decide to cash it out to USD. That’s a much lower rate than normal income tax.
The Tax Implications for the Average Cryptocurrency User
Putting aside the employer, when paying taxes for crypto gains, end of things and focusing on the average Bitcoin user, the tax implications of the above are:
- If you trade cryptocurrency for a good or service, trading a cryptocurrency for a video game for example, then you need to keep a record and report every transaction, reporting the fair-market value of the currency at the time of the transaction. Or in the words of the IRS: “A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.”
- If you trade cryptocurrency as a capital asset, either for another cryptocurrency or fiat currency (like the US dollar), you need to keep a record and report those transactions (using the fair-market value of cryptocurrencies in cases where one cryptocurrency is traded for another). Then at the end of the year, you need to report all cryptocurrency transactions, and all the related gains and losses (and all transactions), and then pay taxes based on your total gains.
Ex. If you trade Litecoin for Bitcoin, that is a transaction that needs to be accounted for by reporting the fair-market value in US dollars at the time of the transaction. Likewise, if you trade Bitcoin to USD, that is a transaction that needs to be accounted for. Contact us to get free tips and guides for trading and taxes.
Bottom line on cryptocurrency and taxes in terms of reporting: You need to keep a record of your trades, transactions, and holdings, tally your profits and losses from selling/using/trading crypto, report that to the IRS at tax time (potentially also filing quarterlies), and then pay your capital gains taxes along with your other taxes. If you make a good faith effort to report and pay, then the worst your likely to see is a fee if you get it wrong, if you try to hide your funds, you could get in trouble. Exchanges typically don’t provide all the information you’ll need for reporting, so it is advised that you keep your own records.
Paying taxes for Crypto Gains – Notes
Below are some notes on cryptocurrency and taxes. When paying taxes for crypto gains.
On stable coins: A stable coin is a bit like a mix between a dollar and a crypto, and thus it logically has some tax implications worth considering in that respect. Although the IRS never issued any guidance specifically on stable coins, logically speaking, for tax purposes trading in and out of a stable coin is a taxable event.
If you hold a stable coin that is valued at exactly $1, and you bought it for exactly $1, you have no gains or losses on it when you trade out of it (and thus converting it to dollars or buying a crypto with it should have no impact on taxes). However, when you trade into a stable coin it is like trading to dollars (like selling) and if the price of the stable coin fluctuates and you gain or lose money in the process you have to report the appropriate gains or losses.
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Watch out for this trap: If you make a gains one year, but then lose them before tax time the next year, you’ll owe the IRS money you don’t have on those gains (unless you and your accountant can make a specific and reasonable case otherwise; although this might not work).
Keep records: It is smart to keep your own records when paying taxes for crypto gains. . Cryptocurrency exchanges (like Coinbase/GDAX) generally keep records for you. However, if you have records, you should use them (or at least verify the exchange’s records using yours).
Know How the Tax System Works: The U.S. has a progressive tax system and a pay-as-you-go tax system. If you trade frequently, you’ll probably owe a higher rate and have to make quarterly payments. Meanwhile, those with low incomes and small long-term gains can end up owing no capital gains tax at all; those with capital gains of less than $1,000 in a year likely won’t have to file a quarterly.
An example of a taxable event / realization event: As noted, when you spend a Bitcoin or other crypto, for example on a good or service, that is a “realization event” (same as trading crypto to crypto or crypto to fiat). At that point, you owe the capital gains tax on the fair market value of the goods or services provided. So if you bought $100 worth of pizza for 1 bitcoin, and you bought the bitcoin for $110, you lost $10 and would tally that loss (or, if you paid $10 for the Bitcoin, you realized $90 in gains and would tally that). When buying goods and services, you may also owe other taxes like the sales tax. Likewise, if you use crypto in business, you could owe other taxes (like payroll or state and local taxes) as well.
On using crypto for your business or mining: In general the same basic rules apply when using crypto as a business or when mining (that is, you tally capital gains when you convert the crypto back dollars or another crypto when paying taxes for crypto gains). However, there are special considerations for mining and business use. We don’t cover every aspect of crypto for business and mining on this page, so if you have a lot of transactions as a business or miner please see a tax professional.
What exactly is being reported: To be clear you need to report the dollar value of each trade and/or transaction throughout the year at the time of the trade. So if you traded BTC to ETH once, you need to go back and figure out the dollar value of that trade. That trade is then considered a capital gain or loss depending on if you made or lost money.