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What Are Crypto Taxes?

Henning Taeger
Henning Taeger
Henning is a writer and editor here at Dollargeek who is passionate about personal finance and cryptocurrency. He enjoys sharing his knowledge about financial management and cryptocurrency with readers, helping them make informed decisions about their money. In his spare time, Henning can be found playing the latest video games or jamming on his guitar. He is constantly on the lookout for new ways to improve his financial literacy and stay up-to-date on the latest trends in the world of cryptocurrency.

DollarGeek's goal is to help you make the best financial decisions. To help us do this, many or all of the products featured here are from our partners. However, this doesn’t influence our evaluations or ratings.

What are Crypto Taxes?
Table of Contents

The cryptocurrency space is currently one of the most vibrant it has ever been. Even though coin prices have seen drops this year, investors continue to flood the market, with many looking to buy cryptocurrencies and hold on to them for the long term.

This influx of investors has led to cryptocurrencies becoming even more mainstream. And like every other mainstream asset, financial regulators across the world have begun to notice cryptocurrencies. 

Proposals have been raised concerning what these assets offer investors, as well as how governments can control them to provide a level playing field for everyone. 

Prominent among these proposals are crypto taxes and tax-related topics. For the past few years, several of the world’s prominent economies have had discussions about how well to tax cryptocurrencies and crypto investors. 

However, due to the lack of regulatory certainty and the fact that not all cryptocurrencies are the same, building a resilient tax regime hasn’t been so easy. 

In this article, we’ll look into the dynamics of crypto taxes and some of the tax-related considerations that investors in the space would need to keep in mind at the moment.  

Understanding Crypto Taxes

As the name suggests, crypto taxes are taxes paid by cryptocurrency investors when they trigger specific requirements. 

Cryptocurrencies are viewed by most financial and tax regulators as assets, and just like other assets (stocks, commodities, bonds, etc.), they incur taxes on several transactions. 

It is worth noting that different tax authorities have their specific interpretations of cryptocurrencies. 

For instance, the United States Internal Revenue Service (IRS) considers cryptocurrencies to be property. This means that they will be subject to taxes in several specific situations. 

If you sell, exchange or use a cryptocurrency in any form that ends up with you making gains, you will have to pay crypto taxes to the government. So, if you bought 1 Bitcoin (BTC) at $20,000 and sold it at $23,000, you would owe taxes on the $3,000 gain that you made.  

The IRS currently taxes profits on the sale of assets held for less than one year. And for 2022, that tax rate stands between 0% and 37%, depending on your nominal income.  

Just as well, you would need to pay long-term capital gains taxes if you made the trade a year or more after initially buying the coin. In such a case, your tax rate could range between 0% and 20% for the 2022 tax year, depending on your income. 

All in all, crypto taxes work quite similarly to taxes on other assets. Investors need to be especially careful about the events that could trigger taxes, as this makes it easier for them to understand the overall tax structure and implications of the asset they hold.  

Crypto Taxable And Non-Taxable Events

As explained earlier, understanding the activities that trigger cryptocurrency taxes can help you to get a better grasp of your liabilities and responsibilities. To wit, let’s take a brief look at possible taxable and non-taxable events in crypto: 

Taxable Events

According to an explainer from the IRS, the following are regarded as events that could trigger crypto taxes: 

Crypto Sales

Imagine you bought Bitcoin for $3,500 in 2020 and its value has now grown to $25,000. If you decide to cash out on your investment, you’ll create a taxable event. 

Here, you need to know your cost basis for the coin you’re selling. This is the total price of the coin – including fees and additional money paid. 

When cashing out, you’d have to subtract this cost basis from the coin’s fair market value at the point of the transaction to know your capital gains or loss. If you made a gain, the amount remaining is the taxable amount.

Crypto-Enabled Purchases

Since cryptocurrencies are now more popular than ever, it is much easier for people to use them to make payments for goods and services. However, transactions like these come with tax implications. 

Usually, you would need to pay a sales tax and create a taxable event at the point of your purchase. Generally, this is how it could work: 

  • Once you make a payment to the retailer’s wallet, you’d incur a sales tax. 
  • If the coin’s value eventually increases after you made the purchase, this triggers a taxable event with a realized gain. If the opposite happens a taxable event with a realized loss is triggered.
  • All in all, you’d need to record the value of the coin you spent and its fair market value at the transaction time. 

Crypto-Fiat Exchanges

You also incur taxes when you exchange cryptocurrencies for fiat currency. You especially create a tax liability if the value of your cryptocurrency is greater than your cost basis. 

You should keep in mind here that you are on the hook for capital gains tax – which is essentially incurred on the realized change in the value of the cryptocurrency. And, like regular stocks, you haven’t made a gain or loss if you don’t exchange the cryptocurrency for anything.  

Cryptocurrency Mining 

People who mine digital assets have to face some different rules. Their job is primarily to verify transactions on blockchains – for which they earn income in terms of mining rewards that are paid in crypto.

For miners, these rewards are taxable as ordinary income. However, an exemption s made if their mining operations are part of a business. 

In that case, the miners report their rewards as business income and can subtract the cost of setting up and maintaining their operations. These costs include rent, electricity, mining rigs, and more.  

Crypto-To-Crypto Exchanges 

Swapping from one coin to another can also incur taxes. Since you’re essentially using one coin to buy another, you’d need to report gains or losses on the transaction. 

Several crypto exchanges allow traders to access information on their crypto-to-crypto exchanges by sharing their trading history. So, it’s easy for these traders and their tax professionals to use this data to determine their tax liabilities. 

Gifts And Inheritances 

It’s also possible for you to give someone a gift in cryptocurrency or leave some coins for your younger ones as part of your will. 

Generally, crypto gifts are subject to the gift tax if they are worth more than $16,000 in 2022. The gift tax rate currently ranges between 18% and 40%, depending on the size of the gift. 

As for inherited cryptocurrencies, these are treated like other capital assets. They can be subject to estate taxes if the estate itself has crossed a specific value – pegged at $12.06 million in 2022. 

Like stocks, cryptocurrencies are subject to a stepped-up cost basis to the fair value at the time of the original owner’s death. 

Non-Taxable Events

That said, there are also some instances where you don’t necessarily need to pay crypto taxes. These include: 

  • Donating crypto to a charity organization 
  • Transferring cryptocurrencies between wallets that you own
  • In some cases, gifts in crypto might also not be subject to crypto taxes

Interestingly, you don’t create a taxable event when you buy crypto with fiat currency – even if the cryptocurrency value increases over time. Instead, the taxable event is created when you decide to sell or exchange the coin. 

How Do You Report Your Crypto Taxes? 

If you’re an avid cryptocurrency user or investor, then you will need to be organized with the way you handle your crypto taxes. 

As explained earlier, the most important thing is keeping a record of all your transactions – as well as the market value of the coins in question at the time you spent them. 

It’s possible to get these logs via the blockchain. Or, you could use a platform to help you track the data. With proper portfolio tracking, it becomes much easier to manage your digital assets and be in compliance with your crypto taxes. 

When the time does come to report your taxes, you would have to fill the IRS Form 8948 – Sales and Dispositions Of Capital Assets. Some of the information you would need to add to the form include: 

  • The cryptocurrency in question 
  • The date you bought it
  • The date you dispose of it – through sales, payments, trades, etc. 
  • Your cost basis 
  • The total gain or loss made via the transaction

Do You Need A Software Or A Tax Consultant?

Generally, this is a recommendation that many experts will make. Considering that the cryptocurrency space remains highly unregulated, understanding your tax liability can be confusing. 

Qualified tax consultants or reporting software can provide you with several pieces of valuable information concerning how best to ensure compliance with your crypto taxes. Some of the areas they could help you with include: 

  • Differentiating between taxable and non-taxable events 
  • Keeping records of all crypto-related transactions 
  • Finding ways to help you reduce your crypto taxes
  • Proper crypto tax filings, etc. 

Conclusion

The crypto space has grown significantly in the past few years. And with this growth has come increased scrutiny from regulators and tax authorities. 

As an investor or a trader, understanding your possible tax liabilities allows you to stay in compliance with your government’s tax laws and regulations. 

While the task of crypto tax compliance can be daunting, getting a reporting software or tax consultant can help make the process much easier.  

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