Starting in 2020, US taxpayers were required to tick a box on their tax returns indicating whether they engaged in taxable events involving cryptocurrency.
Some users may believe that crypto is anonymous and that they can get away with not reporting any crypto gains made, but that is simply not true. Blockchain activity is stored on a public ledger accessible to everyone. And while some wallet addresses may not be linked to a user’s identity (unless the wallet is hosted on an exchange), it is still possible to determine who is behind specific crypto transactions.
Blockchain analysis is becoming increasingly advanced, thanks to data analysis tools powered by artificial intelligence. Naturally, tax agencies are investing in such technology. It would therefore be unwise to assume that you can get away with not paying cryptocurrency taxes.
Mark Kang, cryptocurrency tax expert and CEO of Cointelli, said that “the IRS has already set out its tax policies for crypto assets. Some exchanges, like Coinbase, have reported their users’ transactions to the IRS on an annual basis via Forms 1099-K., 1099-MISC, and 1099-B.”
And starting with tax year 2023, Kang added, “every crypto exchange will be required to issue Form 1099-B. So it’s only a matter of time until those who don’t have yet voluntarily filed tax returns are subject to penalties”.
How Cryptocurrency is Treated for Tax Purposes
In 2014, the IRS issued IRS Notice 2014-21, IRB 2014-16. This makes cryptocurrency subject to capital gains tax in the same way as stocks and bonds, declaring currency to be a form of property. It also categorically answers the question “is cryptocurrency taxed?” for American taxpayers.
The IRS has defined virtual currency as a “digital representation of value that functions as a medium of exchange, unit of account, and/or store of value.” Bitcoin and other cryptocurrencies are considered “convertible” virtual currencies, meaning they can easily be converted into US dollars or other fiat currencies. Transactions involving convertible virtual currencies often trigger a taxable event.
For more details on how the IRS answers the question “is cryptocurrency taxed”, see “Section 4 – Frequently Asked Questions” at this link.
What are the taxable events for crypto?
A discussion of how cryptocurrency is taxed would not be complete without mentioning specific taxable events for crypto.
Any sale of crypto can be treated as a taxable event. There are also many other transactions that could be taxable, such as:
In cases where a user obtains cryptocurrency through methods that do not involve purchase, the crypto is generally treated as income and requires payment of tax on its full value at the time of receipt. Token swaps can also be taxable events.
Using crypto to buy goods or services also counts as a taxable event. These cases are treated as if a user were selling their cryptocurrency for fiat and using it to buy something. For example, if someone bought $100 worth of DOGE, which was then worth $200, and then spent that $200 on a product or service, they would have to pay capital gains tax on the profit made. of $100.
The above covers many of the most common taxable events in crypto.
Calculation of taxes when you buy and sell cryptocurrencies: short-term or long-term
The two main pieces of information needed to calculate the taxes due due to the purchase and sale of cryptocurrency are:
- Net proceeds versus cost
- Asset holding period
These will determine the amount of gains an investor has to pay tax on, as well as whether those gains fall within the short- or long-term capital gains tax rates.
Assets held for less than or equal to 365 days are subject to short-term gains or losses, while those held for more than one year fall under the long-term category.
Short-term capital gains rates tend to be higher and fall into one of seven tax brackets ranging from 10% to 37%. Long-term capital gains rates tend to be lower and fall into one of three tax brackets – either 0%, 15% or 20%, depending on the investor’s income.
It should be clear by now that tracking all these transactions and calculating their cost basis and taxes due is not an easy task for the ordinary cryptocurrency user.
How to make it easy
If this all sounds complicated, that’s because it is. Unless you do nothing more than buy crypto and never sell it, you will in all likelihood have triggered taxable events.
Fortunately, solutions have been developed to ease the process of calculating crypto taxes.
There are a variety of crypto tax solutions available. Most of them are pretty basic and can collect your transactions into a .CSV file for you. But many of these programs can miss important information and lead to inaccurate calculations. They can also be difficult to use for people without specialist knowledge.
Cointelli is built by CPAs and tracks, records, and calculates all the information needed to prepare crypto tax returns. Its proprietary software uses APIs to collect data from the blockchain and determines what is taxable, what taxes are due and at what rates. This allows a user’s capital gains and losses to be accounted for quickly and accurately.
Among other useful features, Cointelli offers users:
- A user-friendly interface
- Accurate and reliable reports
- A simple, step-by-step process
- High import success rate
- Automatic detection of problems in imported data
- Easy-to-read reports that can be sent directly to an accountant or tax department
- 24/7 customer support by real people
Check out Cointelli today and see how easy it is to calculate your crypto taxes.
This article is intended to provide general financial information designed to educate a broad segment of the public; it does not provide personalized tax, investment, legal or other business and professional advice. Before taking any action, you should always consult your own professional tax adviser for advice on taxes, your investments, the law or any other business and professional matters affecting you and/or your business.
This article was created by Cointelli with Insider Studios.