Maybe you are a of the millions of Americans who jumped into the Bitcoin race in 2021. Or perhaps you have become an active crypto trader. Or maybe crypto bonuses have become part of your compensation package at work. You may have even used some of them to buy something or pay others for their services.
You may have thought, cryptocurrencies are not physical currencies; they are not even regulated by the US government. That means I don’t have to pay taxes on the profits I make from trading crypto, right?
While the U.S. Internal Revenue Service’s rules on cryptocurrencies are sketchy in many areas, they made it clear that Cryptocurrencies are considered investable assets for tax purposes.
Taxable profit and loss
To calculate taxable gains and losses, cryptocurrency transactions are treated in exactly the same way as transactions involving stocks, bonds, or mutual funds.
- If you sell cryptocurrency for more than you paid, the profits will be taxed as short-term capital gain if you hold the currency for less than a year. In general, people try to avoid short-term capital gains because they are taxed like ordinary income.
- If you make a profit from the sale of cryptocurrency that you have owned for more than a year, it will be taxed as a more appropriate long-term capital gain. The tax rate will be 0.15% or 20%, depending on your income.
- If you sell cryptocurrency for less than you paid for it, you may experience a capital loss, which could reduce your taxable income or offset capital gains from selling other assets. .
If you plan to trade cryptocurrencies frequently, your options for using capital loss to offset your capital gains may be limited.
Seems relatively simple, right? But what if you’ve been trading Bitcoin, Ethereum, or other cryptocurrencies throughout the year, profiting on some trades and losing money on others?
Will your crypto exchange help you calculate the exact amount you will owe Uncle Sam?
Your answer depends on how many letters.
Fuzzy tax support
Since cryptocurrency exchanges are not regulated by the U.S. Securities and Exchange Commission, they are not legally required to provide the same level of tax reporting that a discount broker and a broker do. must provide investors with stocks, bonds and mutual funds.
While some US-based crypto exchanges provide basic summaries of taxable proceeds from crypto-related trading activities, many do not. .
And, to the best of our knowledge, there are currently no forms that generate IRS Forms 1099-BELL and 8949that brokerage firms and custodians assign to consumers to help them report income and capital gains and losses from the sale of investable assets.