Have you become involved with cryptocurrency over the course of the past year? If you have invested in crypto and you realized a profit because of it, you know why so many people have made Bitcoin and other altcoins a household name. Now comes the less-exciting part: crypto taxes. Few new investors and traders anticipate having to pay taxes on their profits, but the IRS wants the money that you made from both your fiat currency and your digital currency. You’ve probably already guessed that you will need some sort of tax calculator at the very least—but what about the fine print? Here’s what you need to know about cryptocurrency and taxes so that you can be prepared come tax time.
You need to report all of your trading, spending, and income activity.
Bitcoin may be known as a virtual currency, but the fact of the matter is that these digital assets aren’t treated like currency at all. Rather, tax laws define cryptocurrencies like Ethereum, Litecoin, and Dogecoin as property, most resembling similar investment vehicles like stocks. However, it’s a bit more complicated than that. Whenever it’s earned like income (in the form of mining or payment), it’s taxed as both income and capital gains or capital losses when you eventually trade it. If you do spend it with a vendor, this is considered a taxable event as well despite being a transaction. If someone airdrops it to you as a promotion or when a hard fork takes place, this is income as well.
If you’re trading a significant amount of coins and tokens, this can be difficult to track, especially for a beginner. The best way to avoid trouble calculating all of your gains and losses during tax season is to find the best crypto exchange that will help you reduce your trading fees, keep your virtual currency safe, and keep all of your crypto transactions in one convenient place. Some of the top cryptocurrency exchanges that many use today include Coinbase (beginner-friendly with plenty of promotions and opportunities to earn), Kraken (various funding options and high trading volume for your crypto trades), and Binance (low transaction fees and free deposits). If you want to make filing taxes easier, you can find the perfect cryptocurrency exchange from those choices.
You can find ways to reduce your overall taxes if you are in crypto.
Are you operating a business or startup involved in crypto and blockchain? If so, there are likely ways that you can reduce the overall tax amount you owe. One such opportunity that you may be able to take advantage of is a research and development (R&D) tax credit. You may be eligible for an R&D tax credit if you have a business that’s either creating innovative and new products or enhancing existing products, hiring engineers and scientists for the R&D process, and developing new processes and software. Your R&D tax credit can lower your tax liability and act as an extra source of income for your business, which is perfect if you’re involved in the cryptocurrency space.
There are multiple ways to report your capital gains.
When it comes to crypto, you may be surprised to learn that there are multiple ways to report gains from your crypto assets. Some of the reporting methods include First-In, First-Out (FIFO), Last-In, First Out (LIFO), Highest-In, First-Out (HIFO), and the specific identification method. With that in mind, these types of reporting methods can be complex if you trade cryptocurrency. It’s best to find a crypto tax calculator or a crypto accountant that specializes in crypto taxes.
As with any investment vehicle, there are taxes on crypto. Learn more about what these taxes entail and how you can prepare for the upcoming tax year using the guidance above!
