Crypto Trading Tax How to Deal with Taxes on Crypto Assets
Don’t stay in the dark. Discover Everything there is to know about crypto trading tax in the US with this Bitcoin cryptocurrency taxes Ultimate Guide.
The United States is a country where cryptocurrency investors must record every trade they make. Without reliable crypto trading tax information, this can become a problem.
It’s a great thing that the IRS has decided to make a ruling on this subject, but it’s not always easy to understand. That’s why I’ve created this article. It contains everything you need to know about the IRS guidelines and how you should go about filing them each year.
One important thing to know before you read this article is that CryptoDROI doesn’t provide tax advice. I put this guide together for informational purposes only, and it shouldn’t be considered tax advice.
I strongly recommend you consult with a professional who can provide accurate information about your tax situation. The information below applies to the USA tax requirements only.
The world of crypto trading is a complex, fast-moving space that is growing massively every year. It’s difficult for many to keep up with everything that’s going on in the crypto space, which means that many traders don’t take the time to understand their obligations when it comes to filing taxes on their cryptocurrency trades.
In the US, with Bitcoin and other cryptocurrencies at all-time highs, the IRS is watching. Since 2014, the IRS has determined that you should treat cryptocurrency as a capital asset rather than just a currency.
If you own cryptocurrencies like Bitcoin or Ethereum, you need to know how it impacts your tax liability every time you buy it or sell it.
How much crypto tax will you have to pay? You may have heard that crypto trading tax is complicated. It’s not! The first thing you need to do is figure out how cryptocurrency is taxed.
More importantly, with a trading bot making hundreds of transactions per day, you must understand that you need to report those profits or losses when filing your tax report and learn about programs that can help you with that.
Let’s look at a quick guide to crypto trading tax in the United States of America. I will make this more of a question and answer. I know you have got many questions as a crypto trader/investor; we shall look at them now.
Crypto Trading Tax: Do I have to pay taxes?
If you are in any way into cryptocurrency, whether you are a trader or an investor, you are expected to pay tax. The IRS is serious about knowing how you conduct your finances.
They can impose penalties ranging from a warning to a lien against your property to a criminal investigation if you fail to report crypto income.
The IRS considers coins an asset, similar to having land property or any other possession that can appreciate, not a currency in that sense.
Therefore, the tax rules apply to the property, but not the property tax rules. Transactions, such as selling collectible coins or vintage cars that can appreciate, also apply to Bitcoin, Ethereum, and other cryptocurrencies.
Not adhering to the crypto tax laws could attract the disciplines inflicted by the IRS. In the tax returns form, the IRS asks you to answer “yes” or “no” to the question:
Have you had received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency during the year?
When calculating how much you owe in taxes, you need to consider if you earn profits with your cryptocurrency for a “short-term” or “long-term” period. This distinction will also affect how much you have to pay in crypto taxes.
Short-term capital gains and losses are when you buy and sell an asset within one year. These assets will be taxed like regular income, like wages, salaries, commissions, and other earned income.
Long-term capital gains and losses are when you buy and sell an asset you hold for over a year. The tax rates for long-term gains are usually lower than those for short-term gains.
What crypto transactions are taxable
Here, it is essential to weigh your crypto trades to know if you can pay taxes. You should value your trade reports at their markets price in USD.
More like, if you buy a doughnut with bitcoin, the bitcoin exchange must equal the cost of the doughnut (fair market value) in dollars.
Here are some examples of what crypto activities are taxable:
- Sale of Cryptocurrencies for Cash: Do you make investments in crypto? You may be obligated to pay taxes on your crypto gains. If you sell your crypto for more than you paid to purchase it, you may owe taxes like you would on any other investment.
- Selling or Paying for Goods and Services: You accepted payment in cryptocurrency? Receiving compensation for goods or services in cryptocurrency is just like receiving cash. If someone pays you with cryptocurrency, it counts as income, and they might also owe taxes if they make a profit.
- Buy one cryptocurrency with another: Crypto Trading Tax. When you trade one cryptocurrency for another, you owe taxes on any profits you make in the transaction.
- Received Crypto for Mining: You mined cryptocurrency. Do you need to pay taxes on your earnings? Yes, you are responsible for paying taxes on the entire value of the cryptocurrency you’ve obtained by mining.
- Received crypto Through an Airdrop: What if you got some free cryptocurrency? When companies reward people with crypto, they’re paying them taxable income. When someone is given cryptocurrency through an airdrop, it counts as taxable income.
- Received Crypto Rewards: Crypto as a reward? It might be taxable! If you earn virtual currency as a part of a company’s marketing promotion, you’ll need to report it as taxable income.
If I buy something with crypto, is it a taxable event?
Probably, but it depends on the rules in your country/jurisdiction. If this is considered a taxable event in your country, you will pay capital gains taxes (the asset valued while you had it).
For example, let’s say you bought 1 Bitcoin for $ 1,000 and then bought a car with that Bitcoin. At the time of purchase, Bitcoin was worth $ 20,000. The $ 19,000 in capital gains is taxable.
Crypto Trading Tax – Contributions
Contributions Earned in Crypto and Tax Implications.
What happens if I donate my cryptocurrency?
In the United States, if you donate your cryptocurrency to a tax-exempt charity recognized by the IRS (for example, a 501 (c) (3) organization), the IRS does not require you to pay capital gains on the transaction. As explained earlier, you donate based on the value of your crypto to the market value.
What if I receive gifts in crypto?
When you receive a gift in crypto is probably the only time you don’t get to pay tax. This gift is not expected to be a taxable event until you sell your coin.
Does earning cryptocurrencies instead of buying them exempt me from being taxed?
Most countries consider obtaining cryptocurrencies as a barter transaction (payment in kind). Still, you will be taxed as if you had earned an equivalent amount of fiat currency as income.
For example, if you won a bitcoin worth $ 1,000, you will be taxed as if you had earned $ 1,000 in revenue.
How frequently is tax obligatory on cryptocurrencies?
The United States operates on a pay-as-you-go tax system. Pay as you go means that taxes are withheld for the entire year when you get payment from your employer. When you run a business, you pay taxes quarterly.
Owing more than $1,000 in capital gains during the year makes you eligible to make quarterly payments, owing less than $1,000; your fine is an annual payment.
IRS’s example of quarterly capital gains taxes.
From your rough estimate, if you are paying too much or less, you can correct this at the end of the year by using Form 2210 (Underpayment of Estimated Taxes by Individuals, Estates, and Trusts).
If you fail to make your estimated quarterly payments when requested or pay too little, you will be charged a fee.
Trading crypto within an exchange without fiat money?
Trading altcoins remained a taxable event and treated the same as selling your crypto for fiat and then buying the new crypto with that fiat currency.
The taxable event is the sale of cryptocurrencies (whether for crypto or fiat money), not if you withdraw money from an exchange.
Are you receiving a coin from a holder?
There is some debate on treating forked currencies (e.g., as a stock dividend, etc.) as the IRS has no authoritative guidelines.
That said, the more conservative and sensible approach seems to follow the well-established “hidden treasure” doctrine, whereby the IRS has long considered “found” money to be a taxable event.
So, for example, if you own a Bitcoin (BTC) and you received one Bitcoin Cash (BCH), the BCH you received should be reported as ordinary taxable income (not a capital gain). Regardless of you are selling your BCH or not.
Additionally, your new BCH will be part of your reported income, and it is what you will use to determine capital gains after selling your BCH.
There is also a debatable question on the exact method of calculating the fair market value of BCH. For example, there may be a lag between when the fork occurs and when you take charge of the forked coin; this depends on whether you are employing a local wallet or an exchange wallet.
A simple and straightforward approach is to take the price when the forked currency (BCH) is available in your wallet (either on an exchange or in a local wallet) as the base price and taxable income.
Some argue that the cost base should be zero for forked coins and that all benefits should be seen as capital gains, although this is a more aggressive approach. If you don’t know what to do here, ask your tax professional.
Airdrops and Crypto Tax Implications
Airdrops are similar to free money received in a raffle, where a lottery is generally taxed as expected income measured at fair market value on the date of receipt.
If it’s stored in your crypto wallet or an exchange, it’s not yet taxable. Cryptocurrencies received are taxable when you can transfer, sell, trade, or do something with them.
So what is the crypto tax guideline for what is not taxable?
Here are some tax-free events to consider:
- You’re tax-free when you buy cryptocurrency with fiat money. For example, if you buy BTC or ETH with USD.
- When you transfer your cryptocurrency between wallets or exchanges. (provided that you don’t trade it)
- You’re tax-free when you give up to 15k in crypto as a gift.
- You’re tax-free when you donate your cryptocurrency to a charity or nonprofit organization.
How do I evaluate my capital gains?
The simplest and most conservative method is first-in, first-out (FIFO). FIFO means that the first coin you buy (chronologically) is counted for a sale.
The alternative is a specific ID identifying what currency is spent from history using another method (e.g., highest in, first out [HIFO], last in, first off [LIFO], etc.).
For example, let’s say you bought a $700 bitcoin in 2014, a $7,000 bitcoin in August 2016, and a $6,000 bitcoin in November 2016. Then you sold a bitcoin in December 2017 for $18,000.
Using the concept of FIFO, your capital gains would take the income of $18,000 and subtract the first bed cost for that currency ($700 as of 2014). This would translate into a long-lasting capital gain of $18,000 – $700 = $ 17,300.
Using the concept of HIFO, the capital gain would be $18,000 – $7,000 = $11,000.
Using LIFO it would be $18,000 – $6,000 = $ 12,000.
The IRS guidelines are boldly stated on their page, and it says that FIFO and specific credentials can be used for both stocks and bonds, but there is no official and precise rule on cryptocurrency yet.
There is a debate in the community as to whether the IRS will accept a specific ID.
The more conservative approach is to use FIFO, although clear identification may have more tax advantages.
Always resort to your tax experts when it comes to a personal issue or official advice.
The tax rate for my crypto income. What is it?
In the United States, the amount you pay in federal taxes on your crypto income depends on holding time and your regular tax rate.
If you have owned coins for a year or less, they are considered short-term capital gains. In this scenario, the income is added to your payment for tax purposes and taxed at your regular income tax rate.
Once you have held the coins for more than a year, they are considered long-term capital gains. Based on the ordinary income tax rate, the income is taxed between 0 and 20%; in this scenario, your tax bracket will be lower than the short-term.
For example, let’s say your yearly pay is $50,000 and you are single. On January 1, 2016, you bought a bitcoin for $ 400 and sold it on January 1, 2017, for $ 1,000.
You have a short-term capital gain of $ 600, which, taxed at your regular tax rate of 25%, translates into a tax of 0.25 * $ 600 = $ 150 additional federal tax.
Instead, let’s assume your yearly revenue is $50,000 (still a single deposit). You buy a bitcoin in early 2016 for $400 and sell it in mid-2017 for $1,000. You have a lasting capital gain of $600. Your regular tax rate is 15%, and your constant capital profits rate is 0%.
Hence, you don’t pay federal tax on this bitcoin sale (state taxes may still apply).
Crypto Trading Tax Guidance
Where can I get cryptocurrency tax advice?
Talk to a chartered accountant (CPA), registered agent, tax attorney, or another tax professional familiar with your financial situation and local tax laws.
Forms You May Need if You’re Crypto Trading in the USA
The IRS Form 8949: Do you have any transactions that qualify as a capital gain or loss? Fill out this form using your transaction reports from different exchange platforms.
The IRS Form 1040: Mainly referred to as Schedule D, and it is the core of your capital gains and losses.
The IRS Form 1099-MISC: The Miscellaneous Income form is used when you earn $600 or more in a tax year. You can report income from awards/participation fees; most notably, file your taxes.
Schedule 1 (Form 1040) You can use the Schedule 1 form if you earned crypto from airdrops, forks, or other “income” as crypto wages or hobby.
Schedule B (Form 1040) You would use the Schedule B form if you earned staking income or interest rewards from lending your crypto.
Schedule C (Form 1040) You may need to use Schedule C as a sole proprietor to report income if you’re in business for yourself.
Prepare your forms and consult a tax planning professional. Declaring cryptocurrency on your taxes shouldn’t be a DIY project.
How to Reduce Your Crypto Trading Tax
You’ve been putting off understanding crypto taxes, but now you know it’s just part of paying your taxes. But you also want to keep your tax bill as low as possible.
Here are four helpful strategies to reduce your IRS payment.
- Turn your short-term gains into long-term gains: If you want to save on taxes, hold your cryptocurrency for at least a year to take advantage of the long-term capital gains rate.
- Balance your capital gains with your capital losses: If you have a capital loss from a cryptocurrency sale during the year, you can use it to balance your capital gain on another crypto or an investment that has been appreciated.
- Gift some crypto assets to a family member or close friend: The IRS has no problem with you gifting up to $15,000 per year per person without tax consequences. The recipient might be low-income enough not to have to pay taxes on the appreciated property when it’s sold. And for you, you might owe less in taxes than if you were to sell the cryptocurrency yourself.
- Cashout on a low or no income year: Since the tax rate on your long-term capital gains is based on your taxable income — as it is for many taxpayers — then if your taxable income goes down, your tax rate on those gains will go down as well.
How can I calculate my crypto trading taxes?
Unlike long-term investors, crypto traders have to pay taxes on all of their trades.
When you trade crypto, you must pay taxes on the difference between what you’ve sold it for vs. what you originally bought it for, minus the fees that the platform charged.
What about your crypto losses?
Reporting your losses to your tax agency is hugely important to your crypto trading tax savings. Because reporting your losses to the tax agency is one of the best ways to reduce your cryptocurrency taxes in the future.
As you can see, tracking your transactions and calculating gains and losses can get complicated, mainly if you use a trading bot that makes hundreds of trades a day on different crypto exchanges.
For this reason, it is highly recommended that you use software that is specifically designed for tracking crypto transactions.
These crypto trading tax software will calculate the value of your currency at the time of the trade and calculate capital gains or losses based on that information.
Crypto Trading Tax Software
Here are 3 of the best crypto trading tax software on the market today:
- CryptoTrader.Tax is a cryptocurrency tax software built to save you time and maximize your refund. Crypto Trader Tax claims you can get your taxes done in minutes and offer features like Free Report Preview and International Support. They’re also Official TurboTax partners.
- Cointracking is the leader of crypto tracking and tax reporting. CoinTracking is a powerful app that lets you track and analyze your crypto trades. It provides real-time reports on profit and loss, the value of your coins, and more.
- Koinly provides a seamless and easy process for importing and syncing with the ledger. Connect your ETH, BTC, and Tezos wallets to Koinly and automatically import your trading history from exchanges.
There are many other crypto tax software solutions, but these are my favorites based on my personal preferences.
So, I suggest you choose the right crypto trading tax program for your needs because you could find one that offers a unique feature you may want.
In the end, the most critical thing about cryptocurrency tax software is how it can automatically import your investments and trades from different wallets and trading accounts.
This automation takes most of the work out of crypto taxes, so automating this process can save you extra work hours.
When you’re looking for the best crypto trading tax solution, make sure it requires the least amount of input from you to file your taxes.
Gunbot Crypto Trading Tax
Gunbot is a leading provider of automated crypto trading bots for cryptocurrency investors. The company integrates with significant crypto exchanges to allow users to trade across multiple exchanges via one unified trading software.
When you’re trading with Gunbot, tracking your crypto can be a pain. Believe me, when you’re trading several pairs across five or more exchanges, questions like:
What pairs did you trade? How much you bought? Where you bought it? How much you sold it for? What was the fair market value?
Questions like that could drive you insane. 🙂
Trading crypto with a bot is simpler than ever before. You can buy and sell coins on multiple exchanges and even transfer altcoins from one to another.
There’s just one problem: Tracking cost basis and fair market value data for all of these trades is complex.
And as you’ve learned in this article, you must report each of your trades accurately when you file your taxes.
Hence I’ve also given you some information about crypto trading tax tools that will help you import your trade history and generate your tax reports with the click of a button.
Note that I have no affiliation with any of the crypto trading tax software I’ve mentioned in this article, nor I’m recommending one as better than the other, simply do your research and choose what’s best for your needs.
The answer to the crypto trading tax problem is to aggregate all your crypto info into one place. This includes data about coins that you have bought, sold, traded, air dropped, forked, mined, exchanged, or swapped.
You should also include information about coins you have received. When you collect all of this data in one location, you can build an accurate tax profile.
Crypto Trading Tax Reporting Tips for High Volume and Algorithmic Crypto Traders
If you don’t want to use software, there are ways to keep your trading records. Keep in mind that it would take manual work from you to follow these methods if time is not an issue.
- Download Your Trading History from the Exchange: Keep track of all your cryptocurrencies! If you’re not keeping track, don’t worry – most cryptocurrency exchanges allow users to download a CSV or PDF file of the user’s entire transaction history. Then you can hand that information to your tax advisor.
- Use a Specific Identification Calculation Method: Using this strategy, you want first to identify and sell the cryptocurrencies you bought at the highest price. If you have all the data for your transactions, you can use specific identification methods like LIFO or HIFO, drastically lowering your cryptocurrency capital gains taxes.
- Take advantage of your losses to help to reduce your taxable income: You might be surprised to learn that using your losses can be beneficial. You’ll report them on Form 8949, just like the capital gains, but they will reduce your taxable income instead of adding to it. Thus, you’re saving money by filing your crypto losses.
If you’re a full-time Gunbot Trader and you live in the US, you may want to check if you’re eligible for a “Trader Tax Status.”
Traders who qualify for a Trader tax status can enjoy a variety of significant tax benefits.
One of the most important is that trader tax status allows a deduction of a business expense. Another is that it unlocks various other perks that can save traders a good deal of money, such as not paying capital gains taxes on every trade.
Qualifying for Trader Tax Status (TTS) means that you can use business treatment for trading expenses. TTS is also a precondition for electing Section 475 MTM ordinary gain and business loss treatment.
For more in-depth information on trader tax status, see IRS Topic No. 429 Traders in Securities.
Crypto Trading Taxes Around the World
Even though this article is based on information for US taxpayers, I would like to touch briefly on some basic international ideas about crypto trading taxes.
Are crypto transactions legal? When it comes to cryptocurrency, laws, vary from country to country. Current regulations are still being analyzed, but crypto’s decentralized and anonymous nature is at odds with how governments want their citizens to behave.
While many countries are still trying to decide how to handle the issue, parts of the world are legalizing crypto transactions. Your responsibility as an online trader is to analyze what law applies to you based on your countries’ legal status before taking any steps.
Most countries are now actively thinking about what to do with cryptocurrencies as they don’t want to miss out on tax revenue and believe that they need to regulate this market space for consumer protection.
The big deal for the government here is the potential for increasing revenues by taxing the profits generated in the decentralized market. The central question addressed is whether to treat crypto as an investment or as a currency.
Until now, most governments have been inclined to view crypto as an investment, like any other product whose profits are taxed according to a capital gains model.
Some governments view crypto only as a currency with fluctuating relative value and use similar tax rules for foreign exchange transactions and investments.
It has been challenging for governments to enforce tax rules as there are no consistent global laws that require crypto exchanges to report their transactions to the government.
The international and distributed nature of the decentralized market makes it almost impossible for a country to know all of its citizens’ transactions.
With so many countries setting up regulatory bodies and developing correct regulations, the “rules” will likely be dynamic for a few years as governments examine what goes well and what does not work.
Here the advantages of cryptos are that a government or a central bank does NOT control them.
However, when it comes to tax, in the United States, it is an obligation to report gains and losses on every trade or when you win cryptocurrencies, even if the profits or losses are not significant.
And it is expected of you to avoid any form of tax debts or tax evasion. Else, the IRS holds you responsible for reporting all income and transactions, whether or not you receive a tax form from a crypto exchange.
Don’t forget that, as a general rule, crypto and related investments are complex and risky. It’s best to consult a tax professional before making any decisions.
Remember: I put this guide together for informational purposes only, and it should not be considered tax advice or a personalized recommendation.
CryptoDROI does not offer any financial advice, including trading, investing, or any similar crypto activity, including your crypto trading tax decisions.
I like to think of taxes this way: If I have to pay a lot of money on taxes, it means I made a lot of money. So what are you waiting for? Grab your copy of Gunbot so you, too, can start paying taxes on your big profits!
Crypto Trading Tax Resources:
Official IRS Guidance PDF: https://www.irs.gov/pub/irs-drop/rr-19-24.pdf
Publication 544: https://www.irs.gov/pub/irs-pdf/p544.pdf
IRS Publication 550: https://www.irs.gov/pub/irs-pdf/p550.pdf