Taxes and crypto are an uncharted territory for many. Without clearly defined laws or deep understanding of crypto from a government perspective, it can be very difficult to know how to approach tax season correctly.
Taxable crypto actions
First thing to take note of is what are generally deemed as taxable crypto actions.
Receiving crypto as a form of payment.
Mining, yield farming, lending, or staking rewards / interest.
Selling cryptocurrency back into fiat.
Exchanging one currency for another.
Gifting another person crypto.
You only owe tax on your crypto if you’ve earnt more than the original investment or trade which includes any fees involved as well. In other words, a gain must be recognized. Crypto is also categorized as property in the US,
Tax tips for crypto investments
1. Keep track of everything. Whether this means writing entry notes or taking screenshots each time you purchase; it makes the whole process far easier. Subsequently, here’s the data you need to keep track of: Name of the cryptocurrency, date you acquired it, dates you sold / traded / swapped / disposed of it, proceeds and sales price, network fees and costs, total gain / loss, value of the cryptocurrency in fiat at the time, and software costs associated with management of your tax affairs.
2. Listing your crypto as the value after purchase costs rather than amount you bought it for will cut a bit of fat off your taxes as well.
3. Realised capital losses can be offset against gains to reduce assessable crypto income. This is called tax loss harvesting.
4. Another option is to buy crypto stocks instead, that way the stockbroker will keep track of your crypto assets for you and save any headache when it comes to tax season.
5. Eligible crypto deductions exist for costs attached to digital assets, something which opens many advantages when filing your crypto taxes as business use rather than personal use.
6. Holding investments for 12 months or longer subjects the investment to long-term gains tax instead of short-term. Long-term gains tax is set at a lower rate, whereas short-term gains tax is set at your tax bracket rate.
7. Capital gains tax is usually not applicable to crypto when it is used to make bookings or purchases for personal use. This also includes crypto assets worth any amount of money purchased for less than $10,000 if it is also for personal use. Certain restrictions usually apply to this however, namely that the personal use category cannot contain investment or money-making schemes.