Crypto Miners May Be Treated Differently From Others
Do you mine cryptocurrency as a business? Then you might be able to deduct your expenses, as a typical business would. Your revenue is the value of what you produce.
If you mine cryptocurrency, you realize income at the fair market value, so thats your basis in the cryptocurrency, says Harris. If this is a trade or business, your expenses may be deductible.
But that last bit is the key point: You have to be running a trade or business to qualify. You cant operate your mining rig as a hobby and enjoy the same deductions as an actual business.
How Can Investors Save Money On Cryptocurrency Fees
Prior to 2018, certain investment-related expenses were eligible for itemized deductions. For tax years 2018 through 2025, these deductions have been eliminated due to changes made in the Tax Cuts and Jobs Act of 2017.
However, fees incurred when conducting cryptocurrency trades still provide a tax benefit. A fee incurred in conjunction with the acquisition of cryptocurrency can be added into the cost basis of those units. Conversely, a fee paid upon the disposition of a cryptocurrency unit can be deducted from the proceeds received.
How Much Do I Owe In Crypto Taxes
So it looks like some of your crypto activity is taxable what now? You can estimate how much youll owe in taxes by calculating your income, gains, and losses. Heres what that means:
Calculating crypto income
If youre a U.S. taxpayer, youre probably used to seeing your federal and state income tax deducted from your pay stubs. The crypto you receive as income is also subject to these same income taxes, which often won’t be deducted or withheld. When you report your earnings, youll generally owe according to the income tax rate appropriate to your tax bracket. Word of caution: If youve earned a lot from crypto activity, it might affect what tax bracket youre in and you may end up paying a higher tax rate on some of your earnings.
Visit IRS.gov for the latest guidance on federal income taxes.
Calculating capital gains and losses
To calculate the amount you gained or lost, youll first need to know how much crypto you started with. This is called your cost basis.
Knowing your cost basis
When you buy cryptocurrency, your cost basis is generally determined by how much you paid for it. However, if you received crypto from mining or staking, your cost basis is determined by the fair market value when you received it. Your cost basis for gifted crypto will depend on both the basis the person who transferred it to you had and the fair market value when you received it.
Short-term vs. long-term capital gains
Understanding your capital losses
Coinbase Gain/Loss Report
Recommended Reading: Capital Gains Vs Income Tax
How To Pay Tax On Crypto
Crypto investors need to report gains on cryptocurrency on their annual self-assessment tax return or they can use HMRCs real-time capital gains tax reporting service to pay tax on crypto.
Accurate record keeping is really important for anyone who is self-employed, and crypto investors are one such group who also need to keep accurate records for tax purposes too.
HRMC says crypto investors must declare the following:
Date you disposed of them
Number of tokens youve disposed of
Number of tokens you have left
Value of the tokens in pound sterling
Bank statements and wallet addresses
Records of the pooled costs before and after you disposed of them
Getting the right financial advice for your circumstances is key.
If youre still not sure what you need to declare, find your perfect financial adviser with Unbiased now.
What If You Forgot To Report Your Crypto Taxes
If youÊ¼re like many other crypto investors, thereÊ¼s a strong chance that you werenÊ¼t always aware of the fact that your crypto-related income needed to be reported on your taxes.
If you are in this situation, donÊ¼t worry. You can amend a prior year’s tax return to include your crypto-related income with IRS Form 1040X.
ItÊ¼s always better to amend your return in good faith rather than waiting for the IRS to find you. While there is never a way to guarantee that someone wonât be audited after amending their taxes, paying your taxes before the IRS begins an investigation can go a long way to demonstrate that further inquiry is unlikely to find additional reporting errors.
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Crypto Taxes On Capital Gains And Losses
You must naturally be wondering about the crypto taxation policy on capital gains and capital losses. To put it simply, gains on crypto are counted towards taxes only when ‘realized.’ This means that your gains will not be counted as ‘realized’ unless you sell, exchange, or spend the asset. If you only bought BTC once and held it, never selling or exchanging it, then you will only have ‘unrealized’ gains or losses and so, your crypto won’t be taxable!
Do People Pay Their Crypto Taxes
According to the annual CryptoTrader.tax report, only 55% of US crypto investors report cryptocurrency on their taxes.
Further, a CoinTracker.io US study conducted by Wakefield Research found:
- 74% want more guidance on taxes
- 40% did not know selling crypto was subject to taxation
- As of March 27, 2022, only 4% of crypto investors had filed their taxes, compared to 40% of the general public
This data shows confusion and avoidance.
Its not surprising. Rules are complex and following them can be intimidating and overwhelming. Not to mention the paperwork.
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How To Calculate Crypto Capital Gains
So how much tax do you pay on crypto gains?
A capital gain or loss is the difference in value from when you acquired your crypto to when you disposed of it. This is called a taxable event. So any time you sell, trade or spend your crypto – you’ll have a capital gain or loss. If you’d made a profit from your crypto disposal – you’ll have a capital gain. If you’ve made a loss from your crypto disposal – you’ll have a capital loss.
Calculating your crypto capital gain and losses is easy enough. First, you need to figure out yourcost basis. Your cost basis is how much it cost you to acquire your crypto asset, including any transaction fees. If the crypto didn’t cost you anything to acquire – like if you were gifted it – you’ll instead use the fair market value of that cryptocurrency asset in USD, on the day you received it.
Once you know your cost basis – simply subtract it from the value of the asset on the day you disposed of it to calculate whether you have a capital gain or loss.
If you have a gain, you’ll pay Capital Gains Tax on that gain. If you have a loss, you won’t pay Capital Gains Tax – but you do want to keep track of these because you can offset capital losses against gains – more on this later.
Let’s look at an example to figure out how much tax you could pay on cryptocurrency.
You buy 1 BTC in February 2021 valued at $33,000 and pay a 2% transaction fee. Your cost basis is $33,660.
$60,000 – $33,660 = $26,340.
What Are The Current Cryptocurrency Regulations In Portugal
The Portuguese law officially follows EU regulations on cryptocurrency. Gains from buying or selling cryptocurrency are not subject to VAT . Aside from this, there is no other specific legislation on cryptocurrency.
The official treatment of cryptocurrency from 2016 can be found here . The legal status of cryptocurrency in Portugal is that cryptocurrency should be treated in exactly the same way as any other currency in Portugal. This was clarified in a statement by the Portuguese tax authorities given to a company that was planning on mining bitcoins in Portugal.
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Crypto & Taxes: Can You Pay Taxes In Crypto & How Is Crypto Taxed
Do governments tax crypto assets, and can they do this? What if you won the money from your cryptocurrency investment in an online casino for real money? According to the IRS, cryptocurrency is a convertible property or asset. People use crypto assets as a unit of account, and it is a store of value. Therefore, it is taxable.
Here is a summary of how and when crypto assets are taxed:
- If you made a profit from selling cryptocurrency, then you made capital gains, and you must pay capital gains tax
- If you use cryptocurrency to buy goods and services, you must pay tax for the difference in price from the time you bought the crypto and the time you used it to buy goods, but only if the crypto price is higher than what you bought it for
- You must also pay taxes if you accept cryptocurrency as payment.
How Do You Report Crypto On Your Taxes
If youÊ¼re like most cryptocurrency investors, you likely have only bought, sold, and traded crypto via a cryptocurrency exchange. This crypto income is considered capital gains income and is reported as such.
On the other hand, if you earned cryptocurrencyâwhether that’s from a job, mining, staking or interest rewardsâthat earned income is generally treated as ordinary income and is reported as such.
We dive into the reporting for each of these income types below.
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Selling Or Trading Coins From An Airdrop
You’ve already paid Income Tax on your airdropped coins and you later decide you want to sell them so you can invest in something else.
Airdropped coins or tokens are viewed exactly the same way as any other cryptocurrency from a tax perspective, so you’ll pay Capital Gains Tax when you later dispose of airdropped crypto by selling it, trading it or spending it.
Your cost base for your airdropped coins will be the fair market value on the day you received them. We’ll use the same example as above to explain.
Calculating Your Crypto Gains
Once youve assembled your full transaction history, you can start calculating your capital gains and losses. To illustrate the specific details of the calculation, lets walk through some concrete examples of how to match up crypto trades.
If you buy cryptocurrency, trade it short-term for another coin, and then sell that coin long-term for fiat currency, your capital gains tax calculation will be split out between short-term and long-term crypto trades held for a duration of less than a year or greater than a year, respectively. An example of such a transaction series is below:
You bought 1 BTC for $30,000 , thus your cost basis for this lot of 1 BTC is $30,000.
You sold this 1 BTC for $32,000 worth of LTC the next day, thus the proceeds are $32,000.
Subtract the cost basis of $30,000 from the proceeds of $32,000, and your gain is $2,000. This amount is subject to short-term capital gains tax and reported on that year’s tax returns.
More than a year later, you sold the $32,000 of LTC for $35,000 in dollars.
Subtract the cost basis of $32,000 from the proceeds of $35,000, and your gain is $3,000. This amount is subject to long-term capital gains tax and reported on the tax returns of the year in which it was sold.
Now imagine that instead of $32,000 of LTC being sold at a gain, it was sold at a loss. That tax year, you engaged in other trading that resulted in cumulative long-term gains of $50,000.
These are the basic steps of using a crypto tax calculator:
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The Bottom Line: How To Prepare For The Tax Season
Now that we have discussed everything about how crypto taxes work, we must understand how to prepare ourselves for the tax season.
Here are some of the important things you need to know when preparing your crypto taxes:
- Record all your crypto activities: You must keep a detailed record of all the crypto transactions you make, including buying, trading, airdrops, and every taxable event as mentioned in the list above.
- Calculate your capital gains and losses: Now that you have a record of all your crypto activities, you can manually calculate your gains and losses, or take the help of a number of services and tax calculators to estimate your taxes.
- Filling your tax documents and forms: There are various tax forms for various types of transactions. For reporting your cryptocurrency capital gains or losses you have to file Form 8949 and attach it to Schedule D form, which is the primary tax form for overall taxes.
For crypto income taxes you must file Schedule 1 Form 1040 and in case of self-employed crypto earning, you must add Schedule C.
- Submit forms and pay taxes: Now that you have calculated and filed all your tax documents, all you need to do is submit these forms and pay your taxes on time, unless you want to file for an extension. In that case, you must file for an extension before October 15, 2021.
Yes, crypto mining is also taxable on the basis of the cryptos fair market value at the time of mining.
Making A Purchase With Crypto
Many crypto enthusiasts use their cryptocurrencies to make purchases for goods and services. This can be in-store or online.
And each time you make a purchase using crypto, you trigger a taxable event. Essentially, when you buy something with crypto, that crypto is converted into cash and given to the business you are patronizing. You are selling your crypto and using the money to purchase a product.
Also Check: Irs Tax Extension 2021 Form
Cryptocurrency And Portugal D7 Visa
The D7 Visa is also a popular route if you are looking to move to Portugal. The D7 Visa provides you and your family the right to live in Portugal, provided you have sufficient funds for your stay in Portugal. After five years, you are able to apply for Portuguese citizenship.
The D7 Visa is also open to retirees. You can see our article on retiring to Portugal which covers everything that you will need to know about retiring in Portugal.
To see more about the D7 Visa and the Golden Visa, see our article How to Get Portuguese residency. Note that both visa types require following a careful application process, and we recommend speaking with an experienced specialist to discuss these options further.
How Is Crypto Staking Taxed In The Uk
Even Her Majestyâs Revenue and Customs considers staking the same as mining. If staking amounts to a taxable trade, taxes will be applied to the staking activity. Several factors contribute to staking taxation in the UK such as the nature of the organization and the commercial nature of the activity considering you are staking as a business or an individual.
If staking isnât compliant with a taxable trade, the staking rewards will be taxed on the pound sterling value as miscellaneous income, and capital gains tax will be levied when the rewards are disposed of.
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Selling Crypto For Crypto
Selling your crypto for another crypto is viewed exactly the same as selling your crypto for a fiat currency. It doesn’t matter which cryptocurrency you’re selling it for – whether it’s a stablecoin or an altcoin – it’s still a taxable event. You’ll pay short or long-term Capital Gains Tax on any capital gain you make from the transaction.
How Does Us Tax Law Treat Cryptocurrency Airdrops
If you’ve received a token in one of your wallets, whether you asked for it or not, you’re technically required to report the value of that token as ordinary income. You calculate your cost basis at the moment the token was airdropped to you. For example, if you received 400 UNI tokens on Sept 17, 2020 at 11AM – when the price was $0.40/UNI – your cost basis would be $160. If you sold it two days later for $6/UNI you’d have a capital gain of $2240.
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If I Give Someone Cryptocurrency As A Gift Is That Taxable
When you send crypto as a gift to family and friends, thats often not taxable , as long as you dont exceed annual or lifetime limits. The gift also must be no-strings-attached and you must completely give up control of the cryptocurrency.
Currently, the lifetime gift tax exclusion limit is $12.06 million. For 2022, the annual limit is $16,000 per recipient. And the best part? Amounts less than the annual limit dont count toward your lifetime limit!
However, theres still some reporting to do for your crypto taxes. If youre gifting cryptocurrency, you should write the recipient a gift letter containing the original acquisition date and cost basis the recipient will inherit them. You may also need to file a gift tax return.
Understanding The Cryptocurrency Tax Rate
How is crypto taxed? What is the crypto tax rate? What factors affect it? If you’ve got any questions on how your crypto transactions will be taxed, you’ve come to the right place.
Head of Tax and Information Reporting
As the IRS continues to write and revise cryptocurrency tax regulations, its becoming more important for crypto investors to understand just how and when their holdings are taxed.
In this article, well cover the following:
How is crypto taxed?
What is the cryptocurrency tax rate?
How is the crypto tax rate calculated?
What crypto transactions are taxable?
What are the tax implications of inheriting, gifting, or donating cryptocurrencies?
What are other special considerations for cryptocurrency taxes?
What are the IRS penalties for undeclared cryptocurrency?
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