Did you trade crypto in the last year? If so, then there are some things that might affect your taxes. In this article we'll learn when to report it and how various activities could lead up an audit or filing season surprise from Uncle Sam come springtime!
First Things First
MyBlockX doesn't provide any kind of advice on how you pay your taxes.
This article provides our current understanding of IRS guidance, which may change in future. You should consult a tax professional regarding your individual taxes and circumstances
You can view the full updated post here.
Do I owe crypto taxes? (For those who are US based)
Crypto is like any other capital asset in that it can be taxed at different rates depending on how you obtained your crypto, and whether or not you held onto the investment for a certain amount of time.
The most important thing to remember about taxes when dealing with cryptocurrency - even if its value increases over time!
To understand if you owe taxes, it’s important to look at how you used your crypto in 2021. Transactions that result in a tax are called taxable events.
Those that don’t are called non-taxable events. Let’s break them down:
Buying crypto with cash and holding it: Simply buying and owning crypto isn’t taxable by itself. The tax is often incurred later on when you sell, and its gains are “realized.”
Getting a gift: If someone loves you enough to give crypto as a gift, you’re not likely to incur a tax until you sell or participate in another taxable activity like staking.
Giving a gift: You're so nice! You can gift upwards of $15,000 per person per year without paying taxes (and higher amounts to spouses). If your gift exceeds $15k per person, you’ll need to file a gift tax return (which generally does not result in any current tax liability). If you transfer crypto to someone else outside of a purchase for goods or services, it may count as a gift, even if you didn’t mean it that way.
- Donating crypto to a qualified tax-exempt charity or non-profit: If you donate crypto directly to a 501(c)(3) charitable organization, like GiveCrypto.org, you may be able to claim a charitable deduction.
Transferring crypto to yourself: Transferring crypto between wallets or accounts you own isn’t taxable. You can transfer over your original cost basis and date acquired to continue tracking your potential tax impact for when you eventually sell.
Taxable as capital gains
Converting one crypto to another: When you use BTC to buy ETH, as an example, you technically have to sell your BTC before you buy a new asset. Because this is a sale, the IRS considers it taxable. You’ll owe taxes if you sold your BTC for more than you paid for it. I know...painful.
Spending crypto on goods and services: If you use bitcoin to buy a Chinese food, as an example, you’ll likely owe taxes on the transaction. To the IRS, spending isn’t that much different from selling it. You need to sell the asset before it can be exchanged for a good or service, and selling crypto makes it subject to capital gains taxes.
- Selling crypto for cash: Did you sell your crypto for USD? You’ll owe taxes if you sell your assets for more than you paid for them. If you sell at a loss, you may be able to deduct that loss on your taxes.
Taxable as income
Getting crypto in exchange for goods/services: If you accept crypto in payment for a good or service, you’re responsible for reporting it as income to the IRS.
Mining crypto: If you mined crypto, you’ll likely owe taxes on your earnings based on the fair market value (often the price) of the mined coins at the time they were received. Crypto mined as a business is taxed as self-employment income.
Earning staking rewards: Rewards for staking are treated like mining proceeds: taxes are based on the fair market value of your rewards on the day you received them.
Earning other income: You might earn a return by holding certain crypto. This is considered taxable. Although it is sometimes referred to as interest, the IRS treats it differently than interest you would have earned from a bank.
- Getting paid in crypto: If you were paid in crypto by your boss or client, your crypto will be taxed as compensation according to your income tax bracket.
Getting crypto from a hard fork: Taxes on crypto you got from a hard fork depend on how you use the asset, when it’s available to withdraw from your exchange, and more. See the latest IRS guidance on hard forks
Getting an airdrop: You might receive airdrops from a crypto company as part of a marketing campaign or giveaway. Getting an airdrop is taxable as income, and you’ll need to report the amount in your taxes. See the latest IRS guidance on airdrops
Receiving other incentives or rewards: This list isn’t super deep — there are a variety of reasons why you might receive free crypto. These can include incentives like getting $25 in BLKX for referring a friend to MyBlockX.com. Regardless, you’ll need to report these as income.
How much do I owe in crypto taxes?
So you might have to pay taxes on your crypto - what now? You can estimate how much you’ll owe in taxes by calculating your income, gains, and losses. Here’s what that means:
Calculating crypto income
If you’re a U.S. taxpayer, you’re probably used to seeing your income tax deducted from your pay stubs. The crypto you receive as income (like mining, staking, and rewards) is also subject to these same income taxes, which often won't be deducted or withheld.
When you report your earnings, you’ll generally owe according to the income tax rate appropriate to your tax bracket. Word of caution: If you’ve earned a lot from crypto activity, it might affect what tax bracket you’re 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, you’ll 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.
When you sell your crypto, you can subtract your cost basis from your sale price in order to figure out whether you have a capital gain or capital loss. If your proceeds exceed your cost basis, you have a capital gain. If not, you have a capital loss.
Short-term vs. long-term capital gains
Capital gains taxes are applied at both the federal and state (where applicable) level. They can be long-term or short-term, and how long you’ve held your crypto affects how much tax you’ll end up owing. If you held onto your crypto for more than a year before selling, you'll generally pay a lower rate than if you sold right away.
Long-term gains are taxed at a reduced capital gains rate. These rates (0%, 15%, or 20% at the federal level) vary based on your income. Higher income taxpayers may also be subject to the 3.8% Net Investment Income Tax on their gains or other income.
Short-term gains are taxed at your ordinary income rate, which is usually a higher, less-favorable rate.
Remember, taxable events happen when you realize losses or gains, meaning you’ve sold your crypto by either selling for cash, converting to another crypto, or spending it on a good or service. The gains are unrealized if you still own the original shares.
Understanding your capital losses
You’ve realized a capital loss when you sold an asset for less than you paid for it. Losses can work to your advantage, though. You can use losses to offset other capital gains (including from non-crypto assets, like stocks) you may have had during the year on a dollar-for-dollar basis, potentially reducing your overall tax bill.
If you have more losses than gains or have no gains at all, the maximum amount of losses that you can declare each year to offset other income is $3,000. Any remainder carries over to subsequent years until the full amount of the loss is applied.
MyBlockX Gain/Loss Report
COMING SOON, MyBlockX customers will be able to generate a Gain/Loss Report that details capital gains or losses using a HIFO (highest in, first out) cost basis specification strategy.
This report is designed to help taxpayers quickly and easily understand their gains or losses for the tax year, using our calculations. The report will only have information about activity on MyBlockX.
It won’t have information about crypto-related transactions outside of MyBlockX. It’s important to review and verify the information for accuracy before you use it to file. The tool should not be used as official tax documentation.
What if I am not in the US?
If you are from one of these places below, good news! No taxes on crypto for you (for now...)
Keep in mind that some of these countries may want you to pay income tax on it if you are using it as a business for example, but likely you won't have to pay capital gains tax.
Make sure you do your research for your area!
PS... this is not an exhaustive list and new countries are being added frequently. As well keep in mind that a country's rules on taxes might change during the time of this posting. Again, be sure to do your homework for your area.