Your taxes this year may be dominated by a clear question: "At any point in 2020, did you sell, receive, send, trade, or earned financial interest in any virtual currency?"
In previous years, cryptocurrency taxes were a low priority for the IRS and taxpayers. But with cryptocurrencies appearing to be here to stay, the IRS has finally clarified many puzzling questions about cryptocurrency taxes. You might have some questions about virtual currencies this year, and here's a quick guide to get you started. Whether you are HODLing Bitcoin or trading Litecoin intraday, understanding your tax situation can help you avoid taxes and penalties in the future.
When do you pay taxes on cryptocurrencies?
The IRS reports that only 800 to 900 Americans filed property taxes "likely related to bitcoin" in 2013, 2014, and 2015. However, times have changed, and the government now has official crypto tax guidelines. Understanding which events are taxable will help you determine whether or not you owe crypto taxes. Here are some of the several common tax scenarios:
Taxable crypto events
Airdrop and hard fork: as soon as you receive the coins, your tax period begins.
Bonuses, sign-up benefits, and receipt of payments: Whether you get a Bitcoin bonus when you sign up for a new exchange or get paid on Ethereum, they can be considered income taxes.
Cryptocurrency Mining: Profits generated from cryptocurrency mining will be taxed when you sell.
Cryptocurrency trading and exchange: the exchange of one cryptocurrency for another is a taxable event.
Execute a stable coin transaction: Exchanging a cryptocurrency with a stable coin is a taxable event.
Make a purchase with cryptocurrency: When paying with cryptocurrency, a fee will be charged based on the price of the crypto at the time of purchase.
Sale of cryptocurrencies: The tax applies when you sell cryptocurrencies for profit, and there will be a short or long-term tax rate.
Non-Taxable crypto events
Currency and Token Exchange: If a cryptocurrency you own changes its core technology and coin name, even if the quantity of coins changes, you don't have to pay taxes unless their value changes as well.
Gifting cryptocurrency to friends and family: Donations are not taxable, but they will have to pay taxes themselves when they sell cryptocurrency.
Purchase of cryptocurrencies: The purchase and holding of cryptocurrencies will not require the payment of taxes.
Calculating taxes on profits and losses on crypto takes just three steps.
You can have crypto gains and losses from one or more types of transactions. Some examples include:
Exchanging one crypto with another
Selling
Spending crypto on goods and services
Trading
For these calculations, we will exclusively discuss the sale of cryptocurrencies. But the same policies can be applied to other ways you can profit or lose crypto.
Find out how much you earn selling cryptocurrencies.
To find your total profits made, multiply the selling price of your crypto by the amount of currency sold:
If you have two bitcoin and the sale price is $20,000, the total sale amount will be $ 20,000 x 2 = $40,000.
Then subtract the amount you paid for the crypto plus the fees you paid to sell it. (In tax parlance, this total is called the basis.)
Eventually, you will get what is called the realized profit: the profit after sale.
Figure out if you made a profit in the short or long term
Figure out the date you purchased your crypto, then jot down today's date.
With this information, you can find out how long your crypto has been with you or how long you've had it.
You can also estimate if you have short or long term gain:
You have a short-term gain if you keep the crypto for a year or less.
You have a long-term profit if you keep the crypto for more than a year.
Your tax rate depends on the type of profit you made.
Estimate your taxes
If you have short-term income, the IRS will tax your income as regular income. As a result, your tax collection depends on the federal income tax category. Coin mining, airdrops, receiving payments, and initial coin offerings are also taxed as income. Please note that mining coins are specifically taxed as self-employment income.
The main thing you look for when estimating your crypto costs is whether you will pay crypto taxes based on your short-term or long-term profits. Short-term income will depend on your tax category, while long-term income has its category:
2020 Federal Income Groups
Federal income rates and tax brackets for single filers, married filing jointly, and head of households.
If you make a long-term profit, you will pay a capital gains tax rate on your crypto.
You will probably also see a smaller tax cut. The government wants consumers to keep their investments longer and offer lower prices as an incentive.
2020 Capital gains tax rate
Federal income rates and tax brackets for single filers, married filing jointly, and head of households.
What happens if I sell my crypto at a loss?
If you sold your crypto as a loss, you could claim it as a deduction, up to a limit. Here's how to calculate the deduction:
Find the selling price of your crypto.
Multiply the sale price by the value of the currency sold.
Subtract the basis or price you bought the crypto for, plus any fees paid to see it.
If the result is a loss of capital, the law allows you to use this amount to offset your taxable income. But $ 3,000 is the most you can deduct each year.
Final word
Taxes are complicated, and the mix of cryptocurrencies doesn't make it easy. Using a crypto transaction tracker can help you prepare for tax season, even if you use it retroactively to calculate profit and loss accurately. In general, we recommend that you speak to a tax professional, such as SCHNEIDERMAN & FRIEDMAN to get specific answers about your tax situation.
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Schneiderman and Friedman