With all the changes in cryptocurrency, one constant you can always count on is the IRS wanting a cut every year. We’ve put together some frequently asked tax questions from our clients and some tips to share here. Please consult your tax advisor for tax considerations and financial advice for your business.
– Cryptocurrencies are considered property by the IRS and are taxed the same as stocks, real estate, or other property.
– You must pay taxes on all taxable events, including selling, trading, converting your cryptocurrency to cash, or giving it away.
– Tax rates vary depending on how long you hold the assets and the value of the profits.
– Tax forms can be prepared manually, but using automated crypto tax software like ZenLedger can save you time and money by importing transactions from wallets and exchanges.
– In the future, the cryptocurrency tax burden can be reduced through various methods, such as tax collection.
How are cryptocurrencies taxed in the United States?
The immediate conclusion is that you will have to pay taxes on cryptocurrencies in the United States. As of 2023, the IRS considers cryptocurrencies to be property, so cryptocurrencies will be taxed the same as stocks, real estate, or other property.
You must pay taxes for all taxable events. This means that whenever you sell, trade, or give away your cryptocurrencies, you can make all kinds of profits by converting one cryptocurrency to another. You don’t pay tax on the entire transaction amount, only on the profits (also known as capital gains tax).
Your tax rate will depend on a combination of how long you have held your cryptocurrency assets and the value of your earnings. Short-term interest rates apply to assets held for less than one year. Long-term interest rates apply to assets held for more than one year. To learn more, learn more about cryptocurrency tax rates.
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important! This article is for informational purposes only. If you have any questions about preparing a tax return related to cryptocurrency trading, we strongly recommend that you consult with a qualified tax professional. The information in this article does not constitute financial advice and you should do your own research.
What is a taxable cryptocurrency event?
The IRS considers any event where you make a profit from cryptocurrency trading to be taxable. Cryptocurrency purchases themselves are not taxable. You don’t hold any cryptocurrencies, even if your portfolio is worth a lot more than it was in previous periods (lucky you). This is the act of selling or converting to fiat or other cryptocurrencies and making a profit from the disposition, which signals a taxable event.
Let’s say you purchased 1 Bitcoin for $10,000 and now want to spend it when its fair value is $50,000. Here’s how these cryptocurrency events are taxed:
- Sell 1 Bitcoin for $50,000 in fiat currency. You owe $40,000 of taxable income
- Convert/trade/exchange 1 $10,000 worth of Bitcoin for $50,000 worth of Ethereum (i.e. dispose of Bitcoin and buy Ethereum), realize profit of $40,000 and Bitcoin at Ethereum’s new cost basis of $50,000. A taxable event occurred upon disposal. . Starting January 1, 2018, exchanges of “like-kind” property (i.e., not limited to real estate) may be disallowed for tax purposes, and since cryptocurrencies are not real estate, converting one cryptocurrency into another is taken into consideration. A taxable event upon conversion.
- Use a crypto debit card like BitPay’s prepaid debit card to load Bitcoin in increments of $10,000 for $50,000 in fiat. You will be liable for $40,000 of taxable income at the time of loading. This is one of the simplest ways to track realized gains and losses in cryptocurrency, as the taxable event only occurs once at load time and not when the debit card balance is used for a purchase.
- Buy a $60,000 car with 1 Bitcoin You are responsible for $50,000 in capital gains
For advanced scenarios and details on taxable events, read ZenLegder’s guide to cryptocurrency taxes. Things can get a bit more complicated when advanced crypto activities such as margin trading, mining, hacking, lending, staking, airdrops, and reward collection are involved.
How to calculate and prepare your cryptocurrency taxes (2 methods)
The first rule for properly reporting and filing your cryptocurrency taxes is to track your transactions! This can be done manually, but is subject to human error and is difficult to handle realistically. A much more efficient way to prepare your taxes is to use professional crypto tax software like ZenLedger.
Method 1: Manually prepare cryptocurrency taxes
The IRS instructs cryptocurrency users to report gains and losses on Form 8949. Use this form to list details about your cryptocurrency transactions and calculate your liability, including:
- asset name
- Acquisition date
- Date sold or disposed of
- Sale Price
- Cost basis (purchase price)
- profit or loss
After you calculate your profit or loss on Form 8949, include this information on Form 1040 Schedule D. Both Form 8949 and Form 1040 Schedule D must be filed with your annual income tax forms.
Depending on the cryptocurrency service you use, including centralized exchanges like Coinbase or Kraken, you may receive additional forms, including 1099-B, 1099-MISC, and 1099-K.
Method 2: Automate Cryptocurrency Taxes
You could manually track transactions in a spreadsheet and then fill out each form, but this can be a tedious task. Instead, BitPay and ZenLedger make it an easy and automated process. BitPay users can sync their wallet transactions directly within the app with ZenLedger’s intuitive tax software. With just a few taps in the BitPay app, ZenLedger can automatically calculate fair market value, profit/loss, apply cost basis to sold cryptocurrency tranches, and extract tax losses from your transaction history. You can also calculate your cost basis using a variety of methods, including FIFO, LIFO, and specific identification.
To accurately calculate realized profits and losses, it is important to accurately compile the underlying data of all wallets and exchanges that hold your cryptocurrency. Any wallet-to-wallet or exchange-to-exchange transfers between your accounts will be removed upon consolidation. This is because these transfers do not trigger a taxable event.
How to Prepare Cryptocurrency Taxes Using BitPay + ZenLedger
Importing your trading and cryptocurrency information to the ZenLedger platform is easy and secure. This integration only applies to BitPay users based in the US and Canada.
- If you are a current BitPay user, please make sure you have the latest version of BitPay Wallet. New users, download the app here.
- Press the ZenLedger button under the “More” section of the BitPay app home screen.
- You will be prompted to connect your wallet to ZenLedger.
- Log in or create a free ZenLedger account.
- Select the wallet containing the transactions you want to import into ZenLedger.
Once you create a ZenLedger account and connect your wallet, your transactions will appear on your ZenLedger dashboard. You are now ready to prepare and file your cryptocurrency taxes using ZenLedger.
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Minimize payment of cryptocurrency taxes
As explained by ZenLedger, there are several ways to reduce your cryptocurrency tax liability. The most common methods are:
- Protect yourself from human error by using cryptocurrency tax software like ZenLedger
- Tax loss harvesting is utilized to realize losses before taxes are paid.
- Consolidate transactions across wallets and exchanges and appropriately exclude tax-exempt transactions.
- Sell your assets based on when you expect to move into a higher tax bracket.
- Take advantage of long-term capital gains if you hold your assets for more than a year to lower your tax rate.
- For a more efficient tax process, hire a cryptocurrency-friendly accountant (if needed in advanced scenarios) and consult a CPA for timely tax advice.
- Asset diversification through a crypto IRA also has certain tax benefits you can consider.