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Understanding the Crypto Tax Rate – SpendMeNot

Cryptocurrencies are becoming mainstream.

And it’s getting harder to miss!

Reading: Bitcoin long term capital gains tax

We got to the point where almost everyone wants the “free money” piece. And neither the most inflexible old-school investors nor the most inflexible investment firms can ignore this fact any longer.

The only thing is that there is no such thing as free money.

Investing in cryptocurrencies sometimes seems like playing it safe. however, the rather volatile market says otherwise.

Also, there is a specific crypto tax rate to cover every time you make a crypto profit.

and although tax evasion is never an option, what we can do is:

  • learn more about taxes on cryptocurrencies in general.
  • find out how cryptocurrencies are taxed and how high the taxes are.
  • learn how to declare this kind of taxes.
  • find legal ways to reduce your crypto expenses.

These are precisely the topics we will deal with.

what is the tax on cryptocurrencies?

according to the irs, cryptocurrency is viewed as property and not income.

In other words, owning a cryptocurrency is the same as owning any other capital asset such as real estate, cars, stocks, or bonds.

but why does this matter?

is important because income tax can differ significantly from an asset tax. to be more precise, it is not the possession of an asset that is taxed. you pay tax on any potential gains you made through the sale or exchange of that asset.

So cryptocurrency taxes are pretty much capital gains taxes, and can be divided into short-term and long-term taxes.

short-term capital gains taxes

Suppose you have held an asset for less than a year and decide to sell it. If you sell that asset for more than the price you bought it for, and within 365 days, you have realized a short-term capital gain. the same goes for short-term crypto capital gains.

Short-term capital gains are generally taxed the same way your ordinary income is taxed, whether it’s your salary, a commission, or any other category of income. there will be a tax bracket you fall into, based on your earnings.

Globally, income tax rates differ by country. Currently, in the United States, there are seven different income tax brackets. and correspond entirely to the short-term capital gains tax brackets. its range isfrom 10% to 37%.

long-term capital gains taxes

long-term crypto capital gains tax, on the other hand, is somewhat more advantageous.

So if you buy an asset or cryptocurrency and hold it for more than a year before selling it, your capital gains taxes should be lower. they are generally 0%, 15%, or 20%, depending on your income level.

How are cryptocurrencies taxed?

Let’s now move on to more details about the taxation of cryptocurrencies.

first of all, when do you pay taxes on cryptocurrencies? well, that mainly depends on your type of crypto.

mining

In case you have obtained your crypto currency through mining, it immediately becomes a taxable profit. in that case, you are instantly responsible for paying any taxes due. That’s because you don’t need to sell your currency for its value to be realized. In addition, the entire amount mined is subject to tax.

crypto as a gift

If you are lucky enough to receive a crypto currency as a marketing promotion or reward, you will need to pay taxes on that cryptocurrency instantly. again, the full amount you receive will be taxable.

other crypto profits

If you obtain your capital gains through some other method, such as trading, selling or converting cryptocurrencies, then you will be liable to pay taxes on the cryptocurrency gains only once the transaction is made. you need to make what is called “a realized gain” for it to be taxed. In addition, only the capital gain or the difference that you have earned in this process is taxable.

what is your tax bracket?

Now let’s see how to calculate taxes on crypto profits more accurately. As we mentioned earlier, it’s the same as calculating your regular short-term and long-term capital gains taxes.

short-term capital gains tax brackets

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Your holding period begins the day after you purchase your crypto asset or receives the crypto transaction and ends the day you transfer that capital asset to someone else. this is how we make the distinction between short-term capital gains and long-term capital gains.

If your holding period was less than one year, see the table below.

(source: irs)

so you and your spouse together make $20,000 a year. and now you decide to sell the crypto currency that you had previously bought for $1,000 for $2,000. you will have to pay a cryptocurrency tax rate of 12% on your crypto capital gain ($1,000 in this case). therefore, your total tax on this crypto capital gain is $120.

long-term capital gains tax brackets

however, if you are interested in:

how is bitcoin taxed based on irs long term capital gains?

here is the table.

(source: irs)

So let’s say you’re single and your annual earnings are no more than $40,000. If two years ago he had bought a cryptocurrency for $1,000 and now he sold it for $2,000, his capital gain is $1,000. still, he will not have to pay any tax on cryptocurrency gains as he falls within the first bracket (0% tax rate).

but, if your annual earnings exceed $445,850, you will have to pay 20% of your crypto earnings, which in this case is $200.

Please note that these are the federal capital gains tax brackets and your state or local government may apply some additional tax on bitcoin or any other crypto currency for that matter.

For more accurate estimates, you can use the irs tax calculator or one of the many crypto tax calculators available on the web.

how to file your crypto taxes?

In this section, we’ll show you five simple steps to help you take care of your cryptocurrency and taxes in an efficient and timely manner.

1. start on time

Although taxes are usually due in the spring, that certainly doesn’t mean you should wait until the last minute to start your tax preparation.

It may seem like you have a lot of time and that paying taxes on cryptocurrencies is not complicated at all. but don’t forget that as your crypto transactions and conversions multiply, the situation gets even more complicated.

For example, you should be careful if you frequently switch between different cryptocurrencies. every time you make a conversion, it is considered a taxable event.

For this reason, it is critical that you clearly and accurately track every crypto action you take. That way, when the due date arrives, all you need to do is reconcile the numbers and submit the final IRS crypto tax documents.

2. make the distinction between taxable and non-taxable crypto earnings

Still, not everything you do with your bitcoin or altcoin is taxable.

then, while tracking your cryptocurrency business, it will help you know which types of transactions you should report as cryptocurrency capital gains tax and which you shouldn’t.

This is how it works.

3. use all available tools and help calculate your cryptocurrency trading taxes

Fortunately, today, with the help of the right cryptocurrency tax software like cointracker, tokentax, and coinledger, you can easily reconcile your transactions to summarize your capital gains and losses and arrive at the final figures.

Alternatively, if you make too many transfers and transactions each year and dealing with all these numbers is overwhelming, hiring a professional tax advisor might be the right solution for you. Even if all you’re looking for is tax advice, professional help could make a world of difference.

4. use the proper forms to file your crypto taxes

After learning about the different tax rates and collecting the information on all of your previous taxable crypto transactions, it’s time to fill out the correct tax forms.

Be sure to report most of your capital transactions and calculate capital gain or loss according to your forms and instructions. you can use Form 8949 for these purposes.

See also: 13 Best Bitcoin Games to Earn BTC and Other Cryptocurrencies

Next, you can summarize deductible capital gains and capital losses on Form 1040.

5. file taxes with the irs

Now, once the necessary calculations and paperwork have been done, all that remains is to find out:

how to report crypto taxes? or how to send your reports?

there are the two most common ways to do it. you can use tax filing software like turbotax or taxact. Or, you can hire an accountant to submit your tax reports to the IRS and the state.

how to minimize crypto taxes?

As we have seen so far, your crypto tax rate can turn out to be quite significant and even create considerable disruption to your wallet. To help you prevent this, we’ve created some simple yet powerful strategies.

turn your short-term capital gains into long-term capital gains

Whenever possible, convert your short-term capital gains rate to a long-term rate. all you need to achieve this is a little patience, not to realize your gains instantly. sometimes it’s just a matter of days, and sometimes you’ll need to refrain from selling your cryptocurrency for a longer period.

Your bitcoin tax rate may work out much cheaper than the wait it’s probably worth it in the end. still, this is not always the case. so you should trust your calculations and estimates or those of your advisor.

compensate gains with losses

The second most effective strategy to reduce taxes on the sale of cryptocurrencies is to offset capital gains against capital losses. It’s worth mentioning that this works with any other type of capital gains, not just crypto gains.

For example, if you bought your cryptocurrency for $3,000 and then had to sell it for $1,000, this is called a capital loss. it is an unfortunate situation. but, at the very least, you can subtract this capital loss from taxable earnings on cryptocurrencies and other investments. that way, you can achieve significant capital gains tax deductions.

Note, however, that this strategy has some limitations. You can only use up to $3,000 of cryptocurrency capital loss to reduce your ordinary income taxes each year. you can still carry over the remaining amount of the capital loss to the next year.

invest in sdira

Investing in your future is always a good decision, especially if it helps you reduce your taxes.

The self-directed individual retirement account, or sdira, is one way to do this. This and similar retirement accounts allow you to invest tax-free or defer your taxes until you retire, and your capital gains tax bracket is more favorable.

give away or donate some of your assets

Another way to avoid paying taxes on cryptocurrency capital gains is by gifting or donating it.

according to the irs, you can give up to $15,000 a year to your relative without having to pay taxes on it.

Similar to this, you can donate some of your crypto fortunes to charity. Not only can you write off some of your capital gains taxes, but you may also be eligible for deductions from your regular taxable income.

move to a state with lower income taxes

If all else fails, you can always move to another country.

all jokes aside though crypto taxes in the us. uu. are not typically applied at the state level, there are other important expenses to consider. for example, income and corporate taxes vary greatly from state to state. the difference can reach up to 12%. this is not inconsiderable, especially when combined with the federal capital gains tax rate.

from texas with 0% income tax rate to iowa with 12%, usa. uu. is within your reach.

summarize

to summarize:

Do you pay taxes on cryptocurrencies?

yes! You are legally required to pay taxes on each of your bitcoin capital gains.

How are cryptocurrencies taxed?

Cryptocurrencies are taxed as a regular capital asset, according to their capital gains tax bracket.

Accordingly, you can reduce your cryptocurrency taxes by:

  • turn your short-term capital gains into long-term gains,
  • offset capital gains against losses,
  • donate part of your assets,
  • or invest in retirement programs like cider.

Fortunately, today, there are numerous reliable tax software that can help you calculate bitcoin taxes more accurately and avoid errors and fees. And for any additional questions and doubts you may have, you can always hire a professional tax advisor.

See also: Oracle (ORCL) Q4 2022 Earnings Call Transcript | The Motley Fool

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