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Crypto Taxes 101

How Crypto Taxes Work
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.

Cryptocurrency is quickly becoming one of the world’s most important asset classes. Unfortunately, many investors still aren’t fully aware of all of crypto’s tax implications. 

In this guide, we’ll break down everything you need to know about how cryptocurrency is taxed. By the time you’re finished reading, you’ll know how to report your crypto income and capital gains on your tax return and understand how to legally reduce your crypto tax liability. 

How Is Cryptocurrency Taxed? 

In the United States, cryptocurrency is subject to capital gains and ordinary income tax. 

Capital gains tax: When you dispose of cryptocurrency, you’ll incur a capital gain or loss depending on how the price of your coins has changed since you originally received it. Examples of disposals include selling your crypto, trading your crypto for another cryptocurrency, and using your crypto to make a purchase. 

To better understand how capital gains is calculated, let’s take a look at an example: 

Kevin buys $300 of BTC.
Later, Kevin sells his BTC for $500.
Kevin incurs $200 of capital gain. 

If you dispose of your crypto after 12 months or more of holding, your capital gains will be taxed at the long-term capital gains rate (0–20%). If you dispose of your crypto after less than 12 months of holding, your capital gains will be taxed at the short-term capital gains rate (10–37%). 

Ordinary income tax: When you earn cryptocurrency, you recognize income subject to ordinary income tax. Examples of this include mining rewards, airdrop rewards, staking rewards, and referral rewards. 

You’ll be taxed based on the fair market value of your crypto income at the time of receipt. Here’s an example of how crypto income is calculated: 

Maria earns $500 of ETH through staking rewards.
Maria recognizes $500 of income. 

Cryptocurrency income is taxed at ordinary income tax rates (10–37%). 

Can the IRS Track My Cryptocurrency? 

Because cryptocurrency is anonymous, many people believe that transactions cannot be tracked. This is not true. 

Remember, transactions on blockchains like Bitcoin and Ethereum are publicly visible and permanent. Tax agencies can identify fraud by matching ‘anonymous’ wallets to known investors. In the past, the IRS has worked with contractors like Chainalysis for this very purpose. 

In addition, the IRS will soon require exchanges that operate in the U.S. to report their customers’ capital gains and losses on Form 1099. 

How Do I Keep Track of My Transactions for Tax Purposes? 

To keep track of your crypto transactions for tax purposes, you should keep records of the following information: 

  • The type of cryptocurrency you disposed of
  • The amount of cryptocurrency you disposed of 
  • The date you originally acquired your crypto 
  • The date you sold or disposed of your crypto 
  • The cost of acquiring your cryptocurrency (in USD) 
  • Proceeds from your disposal (in USD) 
  • Relevant fees 

Of course, tracking your cryptocurrency transactions is easier said than done. If you’ve been transferring your crypto between different wallets and exchanges, it can be difficult to calculate your cryptocurrency gains and losses. 

Cryptocurrency tax software like CoinLedger can help. The platform can aggregate your transactions across different wallets and exchanges and generate a comprehensive crypto tax report. Whether you’re using exchanges like Coinbase or blockchains like Ethereum, you’ll be able to automatically import your transactions in just a few clicks. 

For an estimation of your crypto tax liability, check out CoinLedger’s free crypto tax calculator tool here

How Do I File My Cryptocurrency Taxes? 

Individuals report cryptocurrency capital gains and losses on Form 8949. Generally, cryptocurrency income is reported as ‘Other Income’ on Schedule 1 of Form 1040. 

Three Ways to Save Money on Cryptocurrency Taxes 

While there’s no legal way to evade your cryptocurrency taxes, the strategies below can help you reduce your tax bill. 

1. Hold Your Cryptocurrency in an IRA 

Individual retirement accounts (IRAs) are designed to help Americans build wealth while limiting their tax liability.  

In most cases, taxpayers use either a traditional IRA or a Roth IRA

In a traditional IRA, your deposits are not included in your taxable income, but you’ll be taxed on gains and withdrawals. In a Roth IRA, your deposits are taxed, but your gains and withdrawals are completely tax-free. 

At this time, most conventional IRA providers don’t allow customers to invest in cryptocurrencies directly. However, you can use a self-directed IRA service like Alto CryptoIRA® to invest in cryptocurrencies like Bitcoin, Ethereum, Solana, and hundreds more! 

Keep in mind that in order to realize the tax advantages of investing in crypto using an IRA, you must wait until six months after turning age 59 (and in the case of a Roth crypto IRA, also have had your account for at least five years).

2. Harvest Your Losses 

Taking losses on cryptocurrency comes with tax benefits. If you dispose of your cryptocurrency at a loss, you can offset all of your capital gains for the year and up to $3,000 of income. Any losses above this amount can be rolled forward into future tax years. 

Let’s take a look at an example to better understand how this works. 

Stacy has $1,000 of capital gains for the year.
Stacy sells her BTC for a $1,000 loss.
Stacy offsets her capital gains—her net gain for the year is now $0. 

3. Realize Profits in Low-Income Years 

The United States has a progressive tax system. Generally, the higher your income, the more you’ll pay in taxes.

As a result, some investors choose to take profits in years where their income is low— for example, when they are in-between jobs or in school full-time. 

Take the Guesswork Out Of Crypto Taxes 

Cryptocurrency tax reporting is a challenge for investors all over the world. By taking the right steps to track your transactions and legally reduce your tax liability, you can save yourself thousands of dollars as well as hours of stress during the tax season. 

Visit CoinLedger.io to learn more about how you can manage your crypto taxes in one place and even import your tax filing information into TurboTax and other leading tax software.

Plus, open a CryptoIRA to start buying and selling 200+ coins and tokens through Coinbase integration with the tax advantages of traditional, Roth, and SEP IRAs.

 

The information above is not intended as investment or tax advice. Past performance is no guarantee of future results. Investing in crypto involves risk, including risk of loss. Please note that CoinLedger is not affiliated with Alto and the views expressed in this guest post are those of the author and do not reflect any recommendations, representations or advice by AltoIRA. Investors are solely responsible for all investment decisions when using Alto self-directed IRAs.