This year, taxes are due on Monday, April 18. If you’re one of the millions of Americans who first traded crypto in 2021, you could be in for a rude awakening when you go to file.
Even among many financial and tax advisors, crypto taxes can be confusing due to a lack of regulatory clarity. That exchanges historically have not been required by law to provide crypto holders with clear records of their trades hasn’t helped either.
Fear not. If you’ve been wondering, “How do crypto taxes work?” we can help. Here, we’ll be explaining some basics about how crypto taxes work, as well as how to avoid capital gains tax on cryptocurrency. (As always, this post does not constitute legal, financial, or tax advice. Always consult a professional about your individual situation and obligations.)
Calculating Crypto Capital Gains Taxes
Crypto, like other assets (gold, stocks, etc.), is classified by the IRS as property. That means you don’t pay taxes on your crypto holdings until you sell them (typically considered a “taxable event”).
A taxable event occurs when you:
- Sell crypto for U.S. currency
- Trade cryptocurrency for another crypto
- Use crypto to purchase non-crypto items
- Buy an NFT using crypto
- Participate in staking or yield farming
So if all you did was buy and hold crypto last year, you will not owe taxes on your investments this tax cycle. That said, you still need to keep track of your investments for when you do need to report them. (More on this in a moment.)
A taxable event also does not guarantee you’ll owe taxes. It does, nonetheless, trigger a reporting requirement. To calculate crypto taxes, start by subtracting the original price you paid in USD for your cryptocurrency (called the cost basis) from the proceeds of the sale or value of the asset you traded the crypto for. This will give you either a capital gain or capital loss.
If your gains outweigh your losses in a given year, you’ll owe taxes on the net gains (the total gains after subtracting any losses). However, if your losses exceed your gains, you may be able to write off your net losses. The IRS allows individuals and those married filing separately to deduct $1,500 per year on realized losses. (Married couples filing jointly can write off $3,000.) In the event of losses beyond the maximum allowable deduction, losses can be rolled over to subsequent years for the purpose of writing them off then.
Calculating taxes on crypto gains requires more than simply reporting gains and losses, though. How long you hold a given investment before selling is key to determining the crypto tax rate you’ll pay.
Short-Term vs. Long-Term Capital Gains on Cryptocurrency
Capital gains are classified as either short-term or long-term.
Short-term capital gains result when you sell an asset within a year of its purchase and are taxed as part of your normal income. Keep in mind that short-term capital gains could push you into a higher tax bracket than anticipated based on your standard income. For the 2021 and 2022 tax years, there are seven federal income tax brackets-10%, 12%, 22%, 24%, 32%, 35%, and 37%-though the associated income ranges vary between years, as well as by filing status.
Long-term capital gains result when you hold an asset for at least a year before selling and are generally taxed at a lower rate. Unlike short-term capital gains, long-term capital gains taxes on crypto and other assets do not count toward your income. Rather they are taxed at a separate rate (but still based on income)-either 0%, 15%, or 20%-with the vast majority of Americans paying 15% or less.
Reporting Crypto on Your Taxes
If you sold crypto last year, you’ll also need to fill out a number of crypto tax forms. These could include:
- Form 1040: Used to determine how much you made and how much you owe, Form 1040 requires you to disclose whether you traded crypto that tax year
- Schedule D: Used to report capital gains and losses stemming from the sale or trade of property, including capital assets (crypto, bonds, stocks, a home, etc.)
- Form 8949: Used to report expenses from the sale of an asset, adjustments to an asset’s cost, and corrections to information provided by an exchange or broker on Form 1099-B
- Schedule C: Used to report income (including in crypto) from self-employment to determine profits and losses
- Schedule SE: Used to calculate Medicare and Social Security taxes on income from self-employment
Additionally, you may receive 1099s from one or more brokers or exchanges reporting your income from crypto trades. These could include:
- Form 1099-MISC: Used to report income received, such as from staking, yields, or provided by a broker or custodian as part of a promotion (including airdrops)
- Form 1099-NEC: Used to report income generated not as an employee of a business, including from crypto mining
Correctly reporting crypto on your taxes is ultimately your responsibility, though there are some software offerings that can help-like ZenLedger, which aggregates user transaction information across thousands of exchanges, wallets, and tokens into one simple dashboard, making it easy to calculate crypto tax liability and populate your forms. (They’re also offering 10% off with the code ALTO10.) Nonetheless, it’s a good idea to keep your own record of each, including the:
- Date of the transaction (purchase, sale, trade, or receipt from a promotion)
- Amount bought or sold
- Price paid
- Value at the time of purchase
- Sale price
- Value at the time of sale
With all this, it’s easy to see how it only takes a few trades to make tax season an even bigger hassle than usual. But what if you could avoid crypto taxes altogether? Or, at the very least, pay less in taxes?
That’s the idea behind an increasingly popular form of individual retirement account: The crypto IRA.
Using an IRA to Avoid Paying Taxes on Crypto Gains
Whether you trade crypto in a Roth IRA or traditional IRA, you do not report or pay taxes on gains. In fact, your profits from crypto trading are not taxed at all until you withdraw them from your IRA (and with a Roth, your gains are never taxed!).
Though many of the big, legacy IRA custodians don’t allow you to invest in crypto with your IRA, the fact is that crypto investing with your IRA funds is now easier than ever. Self-directed crypto IRAs like the Alto CryptoIRA® confer the same tax advantages as any traditional or Roth IRA.
Is a Traditional or Roth Crypto IRA Right for You?
Both Roth and traditional crypto IRAs offer significant tax advantages, as well as exempt you from most or all of the tax-reporting requirements typically associated with crypto.
Read our post to determine which IRA type is right for you.
Alto took what was a time-intensive, paper-heavy, and all-too-often expensive process and made it easy. Now, you can make tax-advantaged investments in a host of alternative assets-including crypto, startups, real estate, and even securitized art, wine, and collectibles—without the burden of complex paperwork or incorporating an LLC.
With the Alto CryptoIRA, you can trade up to 200+ coins and tokens tax-deferred (traditional IRA) or tax-free (Roth IRA) through our integration with Coinbase.
How Much Could You Save By Trading Crypto in a Roth IRA?
Admittedly, calculating the true gains you could avoid paying taxes on is pretty tough, as it depends greatly on how often you make winning trades.
To illustrate how much additional cash you could end up with when investing in a successful crypto using a Roth IRA vs. through a non-qualified account (i.e., not a tax-advantaged retirement account) let’s look at an example.
For the sake of simplicity, our example assumes a single, successful trade using a Roth crypto IRA. As with purchasing outright through an exchange, Roth contributions are made using after-tax money. Keep in mind that due to the single trade, the full tax benefits of an IRA aren’t on display.
Whether trading in a Roth or traditional crypto IRA, gains are not taxed. Nor are you required to report individual trades on your taxes. So even with a traditional IRA, the taxes you’ll pay when you go to take distributions will be based on your income, which in retirement could be significantly lower.
Tax Savings Between a Roth Crypto IRA vs. Taxable Accounts
|Decentralized Exchange||Centralized Exchange||Roth Alto CryptoIRA|
|Initial Crypto Purchase Amount||$1,000||$1,000||$1,000|
|Initial Purchase (Market Buy) After Trade Fee (The Cost Basis)||$997||$985||$990|
(Assuming a Hypothetical 10X Gain Over 10 Years)
|Sale Amount After Trade Fee||$9,940.09||$9,702.25||$9,801|
(Sale Price – Initial Purchase Amount)
(Assuming 15% Long-Term Capital Gains)
|Total Amount You Keep3
(Sale Amount After Trade Fee – Tax Responsibility)
|1 Based on popular decentralized exchanges.
2 Based on a leading crypto exchange’s base-level account.
3 Gains in a Roth IRA account may be withdrawn at retirement tax-free. Note that gains in a traditional IRA are typically taxed at ordinary income tax rates at withdrawal.
Clearly, crypto IRAs are a terrific vehicle for HODLers. Consider the massive growth of Bitcoin. Had you bought $1,000 of Bitcoin in early May 2011, it would have been worth $15.6 million 10 years later on April 27, 2021. Assuming you sold it that day, you would owe more than $3 million in capital gains taxes. Now imagine you’d made that same investment in a Roth IRA!
It’s not just HODLers who benefit, either. With a Roth crypto IRA, no matter how many trades you make-or how much your account grows-you’ll never pay taxes on your gains. Nor will you need to report individual trades on your taxes. That is, of course, assuming you wait to take distributions until turning 59 and a half-the age at which you can begin taking tax-free distributions from a Roth-and that your account has been open for at least five years.
Make All the Trades with None of the Tax Hassles
If you bought crypto through an exchange last year, it’s too late to avoid taxes on your gains, whether this year or in the future. But you can avoid paying taxes on future crypto trades by making them in a crypto IRA.
Alto CryptoIRA offers:
- Access to up to 200+ cryptocurrencies
- No account minimums
- $10 investment minimums
- No monthly account fees
- 24/7 real-time trading
- Market and limit orders
- Coinbase integration
Don’t let complicated taxes get in the way of your crypto trades. Open an Alto CryptoIRA and discover a better way to invest.
4 Reasons You Should Invest in Crypto with an IRA
Over the past decade, crypto has shot from obscurity to become one of the fastest growing asset classes. Here are four reasons you should invest in crypto with an IRA.
How to Avoid Paying Taxes on Crypto Using an IRA
Wondering how to avoid paying taxes on cryptocurrency investments? Here, we discuss the tax advantages of investing in crypto with a traditional or Roth IRA.
Crypto Taxes 101
In this guest post, Miles Brooks, CPA & Director of Tax Strategy at CoinLedger, breaks down crypto taxes and provides tips for how to reduce your crypto tax liability.