Reporting your cryptocurrency transactions is among the most challenging and tedious activities in preparing your crypto tax returns. However, many crypto account holders get confused with the myriad of transactions they need to include in their respective reports.
In this post, we’ll look at the right way of reporting your cryptocurrencies for US tax purposes. Let us discuss:
- which crypto transactions are deemed as taxable, as well as an overview of how crypto taxes are computed
- how to reduce your tax burden through your gains and losses.
Taxable Events Considered in Cryptocurrency
People transact with their cryptocurrencies in a myriad of ways. They can buy cryptos, sell them, trade them, pay for goods using them, and exchange them for fiat money. But the most common misconception is that all these transactions are taxable in some way. Let’s clear this up by focusing on which transactions are considered as taxable events by the IRS.
A taxable event is a transaction that leads to tax liability. These events include transactions where you’ve earned an income or gained profits from an asset sale.
Let’s look into the different crypto transactions and see if they are considered taxable events. We’ll base them on the way the transaction incurs a tax liability.
Buying cryptos is not considered a taxable event and is, therefore, not included in your tax report. The reason being that buying cryptocurrencies doesn’t give you any outright income or capital gains.
Remember that the IRS treats cryptocurrencies as property for tax purposes. How do you get an income from a property? Only by selling or leasing it, right? In this case, buying a cryptocurrency doesn’t count as a taxable event because you don’t get income. You’ll only get income or gains once you do something else with the cryptos you’ve bought.
Selling the cryptos, you hold constitutes a taxable event. That’s because you already gained some profit from the sale of cryptocurrencies that you own. You have to report that gain on your tax report.
Trading One Crypto for Another Crypto
All crypto-to-crypto trading activities are considered taxable events. It remains true even if you did not receive US dollars in your transactions. Under the tax law perspective, a gain is made when you move from this particular crypto coin to another, regardless of whether you gained some fiat money or not from the transactions.
Gains come in two ways – positive and negative. We often call negative gains as losses, but still, it’s important to note for the sake of taxation. You can save on your taxes by using these negative gains – more on that later. Meanwhile, you have to pay taxes on your collective positive gains.
Calculating Your US Crypto Taxes
It would be best if you calculated your crypto gains and losses with the following factors in mind:
- Cost Basis
- Buy/Sell Dates
- Holding Period
- Transaction Fees
Cost basis refers to the collective cost of the cryptos you own before selling them. When you sell your cryptos, you get proceeds from the sale. Your profits could either be taken as cash, a similar crypto coin, or another crypto coin.
Now, subtract the proceeds from your cost basis. The answer should be your gain, whether positive or negative (loss).
Express your gains and proceeds in US dollars. That means you have to convert crypto-to-crypto activities in its US dollar value that is most appropriately used during your transactions’ buy/sell dates.
Other Considerations on Reporting Cryptocurrencies
In this section, we’ll briefly touch on the topics of long-term capital gains, worthless cryptos, ERC-20 and ERC-721 tokens, and mining income. You can even save on tax costs when you utilize these special taxable events properly.
Saving on Crypto Taxes Through Long-Term Capital Gains
Long-term capital gains are profits from a coin that has been held for more than a year before it was traded or sold. There is generally a holding period approved by the IRS and Congress for a gain to be considered as a long-term one. Acquiring long-term capital gains is encouraged by the authorities to create long-term investments in the United States.
Now, you can use long-term capital gains to lower your tax rate. That could be 15% versus your regular tax bracket. For comparison, most people fall in the 20%-30% marginal tax bracket range.
Saving Through Transaction Fees
You can claim your transaction fees to lower your tax costs, especially if you’re a frequent trader. That’s because those fees form part of your trades’ cost basis. High-frequency traders even have more significant transaction fees than their total gains, so it’s a great way to save on tax costs.
Cryptocurrencies That Have Gone Worthless
Altcoins you may have bought in 2017 that have gone worthless can also be used to save on tax costs. Claim them as tax losses, then offset your gains from them.
Taxation Rules on ERC-20 and ERC-721 Tokens
ERC-20 or ERC-721 tokens are also treated and taxed as property. It doesn’t matter what the tokens are doing – follow the calculation method for gains and potential losses and report it to the IRS. Most of the time, gains and losses from these tokens are close to zero. Anyway, you should still report it on your tax returns.
Mining Income Taxation Guidelines
Mining income is counted as business income due to mining costs, such as equipment, electricity, and other utilities used to run the mining activities. You can use the expenses to offset your business income.
Mining may also be counted as staking income if the expenses are not included. It’ll be significantly higher than business income tax with the subtracted costs to it.
Cryptocurrency transactions need to be reported appropriately to create an accurate IRS tax return. Taxable events include selling, trading, and investing in cryptocurrencies.
Calculating your gains and losses for all taxable events is relatively easy, but it can be tedious if you have several transactions to compute. You can also use certain circumstances such as long-term capital gains, cryptos who lost value, transaction fees, mining for business, and tokens to lessen your tax costs.
You can use a crypto tax tool like ACCOINTING.com to take care of all your tax reporting and computation needs. The toll will take all your crypto transaction data from all your wallets and exchanges, analyze them, and come up with a detailed report on your tax liabilities, gains, losses, and all other aspects that need to be reported to IRS.
We hope this article gave you an idea of how to report your crypto transactions the right way. File your tax returns right by getting all your crypto transactions in order with the help of ACCOINTING.com.