So, you’re making money with cryptocurrency? That’s great! But you know what? The U.S. government, or Uncle Sam, wants a piece of the pie! It’s important to know how crypto taxes work so you don’t get in trouble with the IRS.
What You Need to Know About Crypto Taxes
The IRS sees cryptocurrency as property, just like stocks and bonds. You may have to pay taxes on any money you make when you sell, trade, or otherwise get rid of your crypto.
Events that are taxable
- Selling Crypto: If you sell crypto for cash (like USD), you’ll have to pay taxes on any capital gains you make.
- Trading Crypto: If you trade one cryptocurrency for another, you will also have to pay taxes on the trade.
- Using Crypto to Buy Things: If you buy something with crypto, you’ll have to pay taxes on any capital gains you made since you bought the crypto.
- Getting paid in crypto: If you get paid in crypto for goods or services, you have to report it as income.
Gains and losses on capital
When you sell or trade crypto, you will either make money (a capital gain) or lose money (a capital loss).
- Short-Term Capital Gains: If you keep the crypto for less than a year, your profits will be taxed at the same rate as your salary or wages.
- Long-Term Capital Gains: If you keep the crypto for more than a year, the tax rate on your profits will be lower, depending on how much money you make.
How to Figure Out How Much You Owe in Crypto Taxes
- Keep track of your transactions by writing down the date, price, and type of each crypto transaction you make.
- Find out what your cost basis is: The cost basis is the price you paid for the crypto and any fees you had to pay to get it.
- Find out how much you made or lost: To find out how much money you made or lost on your capital gains or losses, subtract your cost basis from the amount you got when you sold or traded the crypto.
Things You Shouldn’t Do
- Not reporting your crypto transactions is a big no-no! If you don’t report your crypto transactions, the IRS will be able to find them and come after you.
- Not Keeping Good Records: To figure out how much you owe in crypto taxes, you need to keep good records.
- Not Knowing the Tax Rules: It’s important to know the rules before you start trading because crypto taxes can be hard to figure out.
How to Make Crypto Taxes Easier
- Use Crypto Tax Software: There are many software programs that can help you keep track of your crypto transactions and figure out how much you owe in taxes.
- Hire a Tax Professional: If you don’t feel comfortable doing your own crypto taxes, you might want to hire a tax professional who knows a lot about crypto.
- You can figure out your cost basis using either the First-In, First-Out (FIFO) or Last-In, First-Out (LIFO) method.
- Give Crypto to Charity: You can take the fair market value of crypto donations off your taxes.
The Bottom Line:
It can be hard to understand crypto taxes, but they are a necessary part of being a responsible crypto investor. Make sure you know the rules, keep good records, and pay your taxes on time.
