Crypto Taxes

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What are Crypto Taxes?

Crypto taxes are the taxes that businesses or individuals must pay on transactions involving cryptocurrencies.

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Cryptocurrencies are subject to taxation in several countries in the world. They are usually taxed either as income or as capital gains. It’s important for people who engage in crypto transactions to understand their local tax regulations and maintain accurate records to adhere to tax laws.

Techopedia Explains the Crypto Taxes Meaning

Techopedia Explains the Crypto Taxes Meaning

Crypto is treated like stocks, bonds and other capital assets in the US. Which means that US taxpayers will owe taxes on money gained from crypto either as capital gains or as income.

In the US, the IRS requires all taxpayers to maintain records of their crypto transactions. Taxpayers must calculate their capital gain or loss on the sale or exchange of cryptocurrencies.

How Crypto Taxes Work

Taxpayers in the US are required to report crypto sales, trades, payments and income to tax authorities. Each of the mentioned transactions have different tax implications.

Your crypto will attract capital gains taxes or income taxes.

Capital gains taxes are taxes imposed on the profit from the sale of cryptocurrencies. Capital gains tax rates may vary depending on your country of domicile, holding period, taxpayer’s income level and more.

Income taxes are taxes imposed on the income of individuals and businesses. Taxpayers are required to file an income tax return every year to disclose their tax obligations.

Types of Cryptocurrency Tax Events

To understand the definition of crypto taxes, it is necessary to know the difference between taxable and non-taxable events. You will also find information on crypto taxation on payments, staking, and mining.

Selling Crypto for Cash
You will owe taxes if you sell your cryptocurrency tokens for a profit. If you sell at a loss, you will be able to deduct the loss on your taxes.

Trading one Crypto from Another
US tax authorities taxes crypto-to-crypto transactions the same way as it taxes crypto-to-fiat transactions. You will have to pay capital gains tax if you sell your token at a profit.

Spending Crypto

According to the IRS, if you use your crypto to buy goods and services, you may own taxes on the transaction.

Taxable events as income:

Getting Paid in Crypto
If you accept your income in crypto, your crypto will be taxed as compensation.

Receiving Payments in Crypto for Goods and Services
Merchants that accept crypto as payment for goods and services are required to report their crypto as income.

Mining
Crypto miners pay taxes on their earnings. 
Staking Rewards
Digital assets earned from staking as considered taxable income in the US.
Other Crypto Earning
Investors that earn rewards through activities other than staking will have to declare and pay tax on those earnings.
Crypto Hard Fork
When a blockchain hard forks, holders of a certain crypto token may receive tokens of the newly-forked blockchain. The taxes on crypto received from a hark fork depends on how the holder uses the tokens.
Airdrops
Crypto received via airdrop is taxable as income.
Rewards from Incentive
Crypto received from marketing campaigns, incentives or learning rewards is taxable as income.

Non-taxable events:

Buying and Holding
Crypto is taxed when you realize gains on your crypto sales. Buying and holding crypto is not taxable.

Donation
If you donate cryptos to a qualified tax-exempt charity or non-profit organization, you can claim a deduction when filing taxes.

Receiving Crypto as a Gift
Receiving crypto as a gift will not attract taxes as long as you don’t sell it or use it from staking and other taxable activity.
Giving Crypto as a Gift
According to Coinbase, you can gift up to $18,000 per recipient per year without paying taxes for 2024 in the US.
Transferring Crypto to Your Wallet
Transferring crypto between your crypto wallets and exchange accounts is not a taxable transaction.

Taxes on Crypto Payments, Staking and Mining

Taxes on crypto payments depend on the nature of the transaction. Crypto income payments for goods and services are taxable, while transfer of crypto as a gift and transfer of crypto to your own wallets and accounts are not taxable.

Staking and mining cryptocurrencies attract income taxes. Each time a miner or an investor receives crypto in the form of mining or staking reward, they will have a taxable income to report.

Crypto Tax Reporting

In order to report your crypto taxes accurately, you will need to record each crypto transaction and log the amount of tokens, purchase/selling price and time to determine tax obligation at the end of the reporting year.

Your crypto tax reporting becomes easier when you buy and sell your cryptocurrencies on centralized crypto exchanges (CEX).

In the US, tax authorities require crypto exchanges and brokers to issue tax forms and provide customers with a copy.

1099-MISC form reports income earned from staking and rewards to the IRS as “miscellaneous income.”

Meanwhile, exchanges will issue you the 1099-B form if you sold cryptocurrencies and traded crypto futures contracts.

When exchanges and brokers may report taxable income to the tax authorities, you will have to ensure that all of your capital gains and losses are accounted for when you file your taxes. Keeping a crypto gains/loss report and transaction history report is required for accurate crypto tax reporting.

How To Minimize Crypto Taxes

Here are ways to minimize crypto taxes:

HODLLong Term HoldingUnderstanding Capital Losses

Holding crypto does not incur taxes. Having a long-term investing viewpoint on crypto investing will result in lower crypto taxes as tax is only imposed on realized gains from a crypto sale.

Capital gains tax rates can differ depending on the length of time an investor holds their asset. Long term capital gains attract lower tax rates compared to short term capital gains. Typically, long term capital gains tax is applied on profits from sale of an asset held for over a year.

Investors realize a capital loss when they sell crypto at loss. Depending on your country of domicile, you may be allowed to use your losses to offset other capital gains and reduce your total tax liability.

Examples of Cryptocurrency Tax Events

Here are examples of historical crypto tax events as mentioned by the IRS.

When Bitcoin (BTC) forked to form the Bitcoin Cash (BCH) chain in August 2017, BTC holders received an equal amount of BCH tokens as a result of the chain split. According to the IRS, the BCH tokens received were taxable as income because “the taxpayer had an accession to wealth.”

When the investor received their BCH tokens, the date of receipt and fair value of the tokens were to be recorded.

The Bottom Line

Cryptocurrency taxation is still a gray area in many nations. Even if your country has not implemented cryptocurrency taxes, it is advised to record details of your crypto purchases, sales, payments and transfer for future reference.

FAQs

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Mensholong Lepcha
Crypto & Blockchain Writer
Mensholong Lepcha
Crypto & Blockchain Writer

Mensholong is an experienced crypto and blockchain journalist, now a full-time writer at Techopedia. He has previously contributed news coverage and in-depth market analysis to Capital.com, StockTwits, XBO, and other publications. He started his writing career at Reuters in 2017, covering global equity markets. In his free time, Mensholong loves watching football, finding new music, and buying BTC and ETH for his crypto portfolio.