Luis Clark
- Home
- /
- USA & Crypto
- /
- Crypto Guides USA
- /
- Crypto Tax USA: Everything...
Crypto Tax USA: Everything you need to know
Luis Clark
The first digital currency was launched in 2008, but it was not until 2014 that the Internal Revenue Service (IRS) recognized digital assets as taxable property. For a whole 6 years, cryptocurrency holders enjoyed tax-free crypto trading and holding in the United States. But not anymore.
Federal authorities are now treating crypto assets similarly to real-world properties. All the tax regulations imposed on traditional assets are now also applicable to digital holdings. Thus, every individual is required to include the details of their virtual transactions in their income tax returns.
Are you a crypto holder and worried about the tax implications when filing your taxes? No idea how to calculate taxes on your crypto income? Don’t worry! This article is a complete guide for individuals who have no idea how to pay taxes on their crypto holdings and are interested in learning more.
Do I Need to Pay Crypto Taxes in the USA?
Only a decade has passed since the launch of the first cryptocurrency in the world. It is not possible for the general population to know about the rules and regulations governing this sector in such a short time period. Therefore, people in the United States often remain clueless when paying taxes on crypto assets.
Cryptocurrencies are equivalent to traditional properties and assets instead of being considered the same as paper currency. This is how the Inland Revenue Service (IRS) sees it. Therefore, every transaction, be it the sale of coins or the use of cryptocurrency for buying goods, is taxed similarly to other capital gains and losses.
Why do Americans Have to Pay Taxes on Crypto?
Crypto capital gains tax events include:
- Selling crypto for fiat money
- Giving cryptocurrency as a gift
- Using cryptocurrencies to buy goods and services, involving even simple transactions like coffee
- Exchanging one digital asset for another. This includes buying NFTs using cryptocurrency.
It’s important to note here that you only pay tax on capital gains from these transactions, not the entire value of the asset sold. This is determined as the difference between the purchase price and the sale price of the asset at fair market value.
The IRS has also yet to clarify whether minting tokens, such as producing wrapped tokens, publicly minting NFTs, or minting interest-bearing assets, constitutes a taxable event. It’s also unclear if depositing or withdrawing funds from DeFi liquidity pools using liquidity provider (LP) tokens is deemed a crypto-to-crypto transaction at this point.
The tax regulations governing cryptocurrencies generated through staking remain the most difficult to understand and apply. In general, placing your coins into a staking pool is not a taxable event, but, the staking rewards you earn may be. While the IRS has not given formal guidelines on staking rewards, it is important to speak with a tax professional who is well-versed in crypto taxation if you earn crypto through staking.
Trading losses can be used to offset capital gains and deduct up to $3,000 from regular income tax, depending on how long you’ve owned the assets. Further losses can be carried over to the following tax year.
Can the IRS Track Crypto?
The crypto sector is expanding at an impressive pace. The federal government has set aside more resources to exercise better control to mitigate fraud and tax evasion arising as a result of the sector’s potential mass adoption.
Despite the anonymity of cryptocurrencies, the IRS may be able to trace your crypto activities. For example, if you trade on a cryptocurrency exchange that offers reporting via Form 1099-B, Profits from Broker and Barter Exchange Transactions, they will report your trades to the IRS.
Furthermore, the IRS uses blockchain analytics technology to identify any crypto activity with digital wallets and link it to individuals in instances where tax evasion and/or money laundering are suspected. All in all, you should ensure that you record all crypto activity taking place during the year on your tax return.
When creating an account on centralized finance platforms, we have to provide personal information like name, e-mail, passport numbers, and pictures of identity cards. These exchanges are instructed by law to collect this information under the Know Your Customer (KYC) regulations.
Kraken and Coinbase, two leading crypto exchanges, were recently instructed to hand over their customer records to the IRS after a judge granted the federal body the authority to investigate suspected crypto tax evasion by users.
The IRS therefore has complete knowledge about each and every transaction being conducted on centralized exchanges. Centralized crypto exchanges will be made to report all transactions conducted on their platforms under the 2021 American infrastructure bill to the IRS.
How Do You Calculate Crypto Taxes in the USA?
Next comes the question, ‘What are the tax rates?’ applicable to crypto assets. The taxes imposed by IRS can be divided into two categories:
- Tax on crypto assets held by an individual for more than a year
- Tax on crypto assets held by an individual for less than a year
According to the 2022-2023 tax filing season, a person selling an asset within 1 year of its purchase is liable to pay between 10% to 37% tax on his capital gains. For a more on-point percentage, the person can calculate the federal income tax bracket under which they fall.
People selling assets within 1 year of their purchase are required to pay a comparatively lower tax of 0% to 20% on their capital gains. The taxes are subject to change, depending on the latest rules and regulations by the IRS.
If you are also buying products and paying for services through the use of cryptocurrencies, you are required to pay sales tax as well as capital gains tax on any increase in your asset’s price, starting from when the purchase was made.
Other individuals liable to pay taxes include cryptocurrency miners. If you fall under this category, then this one is for you! The cryptocurrency you receive in return for mining services is subject to a normal income tax rate. The value of the currency received will be assumed based on the coin’s value on the day it was acquired.
Crypto Capital Gains USA
A newbie in the crypto sphere might show signs of bewilderment when the term ‘crypto capital gain’ pops up. The term can be better understood with an example. Suppose you purchase 1 Bitcoin when the price is $30,000 and sell it off when it reaches $60,000. You made a profit of $30,000. So the capital gain on your crypto asset is $30,000.
Thus, this purchase and sale of cryptocurrencies where you gain capital are taxable events as per IRS law. Taxpayers living in the United States who have secured a gain on their transaction are required to pay a certain amount of tax on their purchases and sales of crypto assets.
Crypto Capital Gains Tax Rate
The crypto capital gains tax rate is the percentage of tax imposed on taxable events. The tax rate can be broadly classified into two categories:
- Short-term Capital Gains: Where investors sell an asset they have held for less than a year. In such cases, the percentage of tax imposed on capital gains is 10-37%.
- Long-term Capital Gains: Where the taxpayer sells an asset that they have held for more than a year. The percentage of tax in these circumstances revolves between 0-20%.
How to Calculate Crypto Capital Gain?
Capital gains or loss is the difference in value between what you bought your crypto for and what you sold it for. This is referred to as a taxable occurrence. So if you sell, trade, or spend your cryptocurrency, you will incur a capital gain or loss. If you profited from your crypto disposal, you’ll have made a capital gain. If you make a loss on your crypto disposal, you will have a capital loss.
It is quite simple and easy to calculate your crypto capital gains and losses. However, you first need to determine your cost basis. Your cost basis is the amount you paid for your cryptocurrency asset, including any transaction costs. If you obtained the crypto for free, such as a gift, you will instead use the fair market value of that crypto asset in USD on the day you received it. After you’ve calculated your cost basis, subtract it from the asset’s value on the day you sold it to see whether you made a capital gain or loss.
If you make a gain, you will have to pay capital gains tax on that profit. However, if you incur a loss on the sale of a crypto asset, you can offset the capital losses against capital gains.
Can I Reduce My Crypto Capital Gains Taxes?
Long-term crypto trading should be prioritized wherever feasible if you wish to avoid higher taxes. As previously stated, long-term capital gains are taxed at a lower rate than short-term capital gains.
The IRS provides for special identification accounting for digital money. This inventory value approach allows you to manage specific tax lots, enabling you to carefully match up sales and acquisitions. If you want to save money on taxes, then consider making long-term trades.
While long-term transactions may reduce a crypto investment’s taxes, the state and federal tax rates for an individual’s income bracket could make short-term capital gains more attractive.
USA Crypto Taxes Threshold
Every individual who makes a gain of as low as $1 needs to show the profit he made in his annual tax return. Investors and traders exchanging more than $20,000 or more than 200 trades in one year receive form 1099-K. This IRS form is used to record online transactions worth substantial amounts.
Business Income Tax
Generally speaking, businesses operating in the United States pay corporate taxes at the rate of 21%. South Dakota and Wyoming are the only two exceptions that do not place taxes on corporations. Partnerships do not fall in the business tax bracket. Instead, each partner has to show their portion of profits in returns and pay tax accordingly.
However, businesses can deduct state corporate income taxes paid from federal taxable income, decreasing the effective federal corporate income tax rate. For example, a company in Rhode Island can deduct tax paid at a flat rate of 7% against the federal corporate income tax of 21%, lowering its federal rate to 19.53% and resulting in a total rate of 26.53%.
Furthermore, two states – Alabama and Missouri – let businesses deduct a percentage of their federal corporate income tax from their state corporate income tax. Alabama provides for a complete deduction of federal corporate income tax liability against state liabilities, whereas Missouri allows for a 50% deduction of federal corporate income tax liability. This reduces the effective corporate income tax rate that companies in these states are otherwise liable to pay.
Crypto Income Tax
Millions of Americans have embraced the crypto-economy in recent years, which means you’ve likely made one or more crypto moves yourself lately, such as spending, mining, lending cryptocurrency, and so on. It is critical that you spend some time thinking about and researching one of the less-pleasant aspects of your journey: taxes.
Purchasing cryptocurrency is not a taxable event in and of itself. You may acquire and hold crypto without paying taxes, even if its value rises. However, there must initially be a taxable event, such as selling the currency for a gain.
The IRS has taken efforts to guarantee that cryptocurrency investors pay their taxes. Tax filers must respond to a question on Form 1040 inquiring if they had any form of transaction involving a digital asset during the year. Crypto exchanges are obliged to file a 1099-K for clients who have more than 200 transactions and more than $20,000 in trading during the year.
If you receive cryptocurrencies in lieu of your services, including job, mining, airdrop, or staking, you are subject to ordinary income tax rates of 10-37%. The greater the taxable income, the higher the percentage of tax.
The sale and purchase of cryptocurrencies do not fall under the ordinary income tax heading. People performing crypto transactions pay capital gains tax instead of ordinary income tax. The capital gains tax can be further divided into short and long-term capital gains.
Crypto Capital Loss
Do you own an asset that you initially bought at a very high price, but unfortunately, now the value of the aid asset has significantly declined? No need to worry! Tax loss harvesting is one great way to cover your losses. Here is everything you need to know about it.
The first step in tax loss harvesting is selling an asset that, instead of showing growth, is declining in value. The loss incurred with the sale of the digital asset can be used to bring down the taxable capital gains and your tax amount.
By declaring the amount of loss suffered, an individual can get an adjustment of up to $3,000. The amount of money obtained from selling the underperforming digital asset can be used to buy assets that offer a greater return on investment.
In the United States, Bitcoin is taxed at a reduced rate when sold after a 12-month holding period. When you sell cryptocurrencies after a period of 12 months or longer, you must pay long-term capital gains tax (0-20% depending on your income level). When you sell Bitcoin after less than a year, you will pay regular income tax (10-37% depending on your income level).
It is crucial to remember that short-term capital losses counter short-term capital gains first, and long-term capital losses first offset long-term capital gains. If you have any leftover net capital losses, they can be used to offset capital gains of the other type.
Tax on Lost or Stolen Crypto
Hidden among the numerous question that keeps an investor’s mind occupied is the fear of losing an investment. How can that happen?
Generally speaking, you cannot deduct losses for lost or stolen cryptocurrency on your tax return. According to the IRS, there are two categories of capital asset losses: catastrophe losses and theft losses. In general, casualty losses in the crypto world refer to damage, destruction, or loss of your crypto as a result of an identified occurrence that is abrupt, unexpected, or unusual. As an example, this may involve inadvertently sending your cryptocurrency to the wrong wallet or any other similar incident; however, other elements may need to be evaluated to decide whether the loss is a casualty loss. When your wallet or exchange is hacked, you will suffer theft losses.
As per the tax rules applicable from 2018 onwards, traders and investors are not allowed to adjust losses incurred by casualty or theft of their crypto assets. Thus, the crypto gains cannot be reduced or adjusted to lower taxes. These tax reforms will continue as such till the year 2025.
Tax on NFTs Trading
NFT taxes operate in the same manner as crypto taxes. If you make a profit from selling an NFT, you must pay taxes on that profit. Remember that if you mint an NFT and pay gas fees in crypto, this is viewed as purchasing a service with your crypto, which is a taxable event. If the value of the cryptocurrency you used for the gas cost has grown since you purchased it, you will be required to pay taxes on the amount of the gains.
Although the rules related to taxes on cryptocurrencies were laid down in 2014, it wasn’t until 2022 that the IRS came up with guidelines for tax on NFTs.
According to the rules, non-fungible tokens will be taxed the same way as cryptocurrency, i.e. 0-20% for long-term capital gains and 10-37% for short-term capital gains.
Tax on Crypto Gifts and Donations
Giving gifts to loved ones is one great way of showing affection. As of today, traditional presents are being actively replaced by virtual gifts. This means that people are giving cryptocurrencies and digital assets to loved ones as gifts. Want to know if your gift will be taxed? Here is all the information related to tax on crypto gifts.
If you are a gift recipient, you have nothing to worry about. Beneficiaries are never asked for taxes. However, if you decide to sell out that gift, then get ready to pay tax on the capital gain you made. If you are the benefactor or the sender of a particular gift, however, you are liable to pay taxes.
The IRS defines a taxable gift as “any property transferred for less than adequate and full consideration.” Simply put, a gift is when you offer something to someone and do not receive anything in return, or when you receive something less worth than the asset you gave.
There is a lifetime gift tax exemption of $16,000 on gifted cryptocurrency. This means an individual is exempted from paying taxes on gifted cryptocurrency if the combined value of all the outgoing gifts is less than 16,000. If gifts are more than $16,000, then the lifetime gift tax exemption is no longer applicable.
Is Any Crypto Tax-Free in the USA?
The IRS taxes every single cryptocurrency. There are no exceptions and safe havens. However, if someone wishes to bring down their total crypto tax amount, then here is what they can do:
- Hold cryptocurrencies for longer time periods.
- Use tax loss harvesting to bring down the gains and, thus, the tax amount.
- Make use of the lifetime gift tax exemption to bring down the total taxable income.
- State mining expenses in the annual tax return to become eligible for rebates and incentives and for reducing income taxes.
What is a Crypto Tax Calculator?
As of 2023, the government has introduced several income tax regulations for crypto transfers. Any revenue received via crypto transfers would be taxed at a 30% rate. Furthermore, no deductions from the cryptocurrency’s sale price are permitted, with the exception of the cost of purchase. Also, you cannot offset the loss incurred from the transfer of cryptocurrencies with revenue from any other category. Such losses cannot be carried over to consecutive years in order to offset potential profits from crypto trades for tax purposes.
This is where the crypto tax collector comes in to save the day. The crypto tax calculator assists the taxpayer in calculating the amount of tax owed by using the applicable income tax laws. If you are new to the crypto sphere and have no idea how your cryptocurrency is taxed, then you may use the crypto tax calculator.
This innovation not only helps newbies in the crypto sector with their tax issues but also helps save the time of amateur investors.
Cryptocurrencies obtained through purchase, as a gift, or as payment for services availed are subject to different tax rates. A crypto tax calculator computes the capital gain, losses, income tax, and capital gains tax quickly. It saves us all a great amount of trouble!
How to Use a Crypto Tax Calculator?
A crypto tax calculator makes calculating crypto taxes a hundred times easier than doing it manually. Different tax calculators operate in different ways. While some calculators import data directly from crypto exchanges and wallets, others require manual input of purchase and sales prices. Whatever the case, the complete crypto tax report is made available to you at the speed of knots. That being said, here’s how you can use a regular crypto tax calculator:
- Enter the sales price of the cryptocurrency transferred as well as the cost of acquiring it in the utility tool provided. The tool will show the amount of income tax you must pay on the particular crypto transaction. It is crucial to remember that you must pay the relevant surcharge and cess in addition to the tax burden determined by the crypto tax calculator.
- Instead of aggregating the statistics for the entire year, the details should be put in the crypto tax calculator per transaction. Furthermore, the purchase price should not contain any extra costs. Apart from the acquisition cost, the income tax laws do not allow any deductions from the sales price of assets.
Best Crypto Tax Calculators in the USA
The amount of money that can be made through crypto trading is commendatory. The sector offers a great return on investment (ROI) and annual percentage yields (APY). This is one reason why the number of investors in this industry is continually rising.
Like all financial systems, investors and traders in this sector must pay taxes on their crypto transactions.
When paying taxes on these returns, however, investors often get vexed. This is primarily due to the complexity of the financial system and the difficulty navigating through it. Investors and traders can save a great deal of time by opting for a crypto tax calculator.
Here are some of the best crypto calculators that are at your disposal:
- CoinTracker: CoinTracker is a simple crypto tax program that allows you to manage your cryptocurrency portfolio, investment performance, and taxes by adding your wallet or exchange. It supports over 8,000 crypto assets and 300 exchanges, and you can export your crypto tax reports to TurboTax or TaxAct.
- CoinLedger: CoinLedger provides extra features centered on cryptocurrency revenue, making it a favored option for many crypto users who work with Bitcoin and other cryptocurrencies. This crypto tax advisor walks your clients through the process of importing their cryptocurrency transactions step by step.
- Koinly: Koinly is a crypto tax program that allows you to create a cryptocurrency tax report in just a few minutes. It allows you to obtain a free preview of your capital gains tax, and you can even follow your anticipated capital gains on crypto over time rather than being caught off guard when tax season arrives.
- TaxBit: TaxBit is a crypto tax tool that links you with both business and consumer cryptocurrency tax experiences. TaxBit, one of the most affordable cryptocurrency tax tools, employs automated technologies to sync your data and generate final tax returns without the need for human involvement.
- CryptoTaxCalculator: CryptoTaxCalculator provides highly accurate tax calculations. It allows you to create tax reports for all fiscal years. It is one of the most precise cryptocurrency tax software options available to investors and accountants. The website provides a detailed analysis of each calculation so you can understand exactly how your taxes were calculated.
- Zenledger: ZenLedger is a cryptocurrency tax program that integrates with over 400 exchanges, including 30 Defi Protocols. This crypto tax calculation tool, which has over 15,000 clients, simplifies crypto taxes for investors and tax experts alike.
- Coinpanda: Coinpanda is a prominent tool for calculating crypto taxes and submitting them to authorities. It supports over 12,000 coins, wallets, and blockchains and offers direct connection with over 500 exchanges.
- CoinTracking: CoinTracking analyses are cryptocurrency tax calculations that assist you in trading and creating real-time crypto reports on profit and loss, as well as the worth of your crypto coins. You will also receive regular updates on realized and unrealized profits, tax returns, and a lot more.
Final Thoughts
The United States considers crypto transactions as taxable under its 2014 tax regulations. Individuals have to report these transactions in their tax returns. Those who do not comply with these rules are penalized according to the law.
FAQ
Most frequent questions and answers
The tax reforms of 2014 recognize cryptocurrency exchange as a taxable event. You have to pay taxes on Bitcoin and other crypto transactions.
The amount of tax you are liable to pay is inversely related to the duration for which the asset is held. The tax applicable on your gain would be between 0-20% if the asset in consideration were held for more than 1 year. However, if the crypto asset was held for less than a year, you have to pay taxes between 10-37%.
The answer is no. All cryptocurrencies, be they Bitcoin or any other altcoin, are subject to taxes. Individuals looking to lower the payable tax can resort to other options, like living in states with flexible crypto rules and regulations. Nevada is currently the most crypto-friendly state in the United States, which Florida closely follows.
Yes! the IRS can track cryptocurrencies. Under the John Doe Summons, issued by a federal judge, the IRS can demand customer information from exchanges. Coinbase and Kraken are two exchanges that were asked for user data by the IRS using this summon.
Crypto exchanges also hand over 1099 forms to the IRS. The transaction for which the form 1099 was issued should be included in the annual return. Failure to report transactions in tax returns is heavily penalized by the IRS. The 2021 American Infrastructure Bill furthers the authority of the IRS. Under this bill, the federal tax collecting body will get reports for each and every transaction from the exchange.
Tax on crypto can be broadly divided into two categories. Tax on crypto gains and tax on crypto income. Tax on gains means that any profit made on the sale of digital assets will be taxed by the Internal Revenue Service (IRS). Many individuals receive crypto as payments for their services, such as mining services. The incoming payment is treated as ordinary income and is subject to income tax depending on the rates prevailing in the state.
You can manually calculate the crypto capital gains or use a crypto tax calculator. For manually calculating the capital gain, you can use the formula:
Capital Gains or Loss = Proceeds – Cost Basis
An online tax calculator not only helps save your time but also culls the need for highly complex computation.
This one is quite simple. Subtract the sales price of an asset from its cost price to calculate the profit you made.
The mere act of purchasing crypto is not a taxable event. However, when you decide to sell a digital asset, that is when you are liable to pay taxes. The tax rates vary between 0% to 37% and depend on the extent of time for which they were held.
The profit made on the sale of crypto is classified as ‘short-term capital gains’ if the duration for which the crypto assets were held is less than 365 days. In such cases, the tax rates are between 10-37%. If the digital asset is held for more than 365 days, the profit is termed ‘long term capital gains’. In the circumstances like these, tax rates vary between 0-20%.
Yes! conversion of one cryptocurrency for another is subject to tax.
Yes! You have to pay a tax of 0-37% on the gain made by selling digital assets.
Skrumble.com provides all its content for informational purposes only, and this should not be taken as financial advice to buy, trade, or sell any investment instruments or products, including but not limited to cryptocurrencies, or use any specific exchange. Please do not use this website as investment advice, financial advice, or legal advice, and each individual’s needs may vary from that of the author. Investing in financial instruments, including cryptocurrencies, carries a high risk and is not suitable for all investors. It is possible to lose the entire initial investment, so do not invest what you cannot afford to lose. We strongly advise conducting your own research before making any investment decisions. This post includes affiliate links with our partners who may compensate us.
To view our privacy policy read here.