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Crypto traders could face huge tax bills after the 2021 big rally


TThe price of Bitcoin has nearly doubled this year, although that seems downright paltry compared to a huge spike of 47,000,000% – yes, it’s 47 million – for the Shiba Inu coin. If you are among the 16% of Americans that Pew Research estimates invested, traded, or used a digital coin, then you may have to pay taxes in April.

As with stocks, investors are required to pay federal taxes on cryptocurrency profits. Virtual currencies are considered property by the Internal Revenue Service, and investors must pay capital gains taxes – and the rate depends on how long you own the coin before selling it. Short-term capital gains on assets held for less than one year are taxed as income, with tax rate for 2021 ranging from 10% to 37%, depending on your income. Meanwhile, most investors have to pay a 15% or 20% tax rate on long-term capital gains for assets held for more than a year.

The IRS makes an “interesting” distinction between cryptocurrencies and other assets: If you’ve been paid with a virtual coin, then you’ll need to count the payments as income, notes Scott Kellter, portfolio manager at Envestnet. For example, if you mine bitcoin and earn a Bitcoin payment in exchange, you must report that payment as income at its value (in US dollars) when it is earned, he adds. And then you get taxed again if you sell the coins you mined.

“The way I think about it is this: the way you use your cryptocurrency is the way it is taxed,” adds Lisa Greene-Lewis, certified public accountant and editor of the TurboTax blog. That said, if you’ve bought digital coins in the past year but haven’t sold yet, you won’t have to pay taxes on those investments, she says.

How to Report Crypto Profits to the IRS

If you’ve reported capital gains on other investments in the past, you’ll need the same information for cryptocurrency investments: the dates you bought and sold, as well as your cost base (the original price paid) and the amount of profit or loss.

“It seems crypto investors tend to be younger and more active in trading,” Keller notes. “If they have to report hundreds of transactions, it can be a bit of a tricky process. ”

While investors should receive a Form 1099 with the information needed to report crypto-related capital gains and losses, you may not. The most popular US brokers including Coinbase and Robin Hood – will provide this tax form, which allows for a “really clean and easy” reporting process when filing your tax returns, Keller says. But these platforms aren’t yet required to report tax information to clients, so you may have to report capital gains and losses yourself, Greene-Lewis adds.

Things get complicated if you move digital coins from one exchange to another, in which case the accounting information may be inaccurate, Keller cautions. “Cryptocurrency investors are strongly recommended to follow everything on their own,” he says, adding that this information will also be valuable if the IRS changes its tax treatment for cryptos in the future. “Make transaction accounting a priority. ”

Many tax software allow taxpayers to download financial information from a variety of financial institutions. And TurboTax recently launched a cryptocurrency tax calculator.

Because you are also required to pay taxes to spend cryptocurrency, it is important to keep a good history of these transactions. In the eyes of the IRS, the gain is the difference between the dollar value of what you received and the cost of the virtual currency you bought it with, says Greene-Lewis.

Finally, don’t forget about state taxes. The majority of states treat capital gains as ordinary income, which means you will be taxed at a higher rate when filing your state taxes. If you live in California, be prepared to pay an additional 1% to 13.3% on your crypto capital gains, depending on your income. But eight states, including Florida and Washington, have no income tax.

How to reduce your crypto tax bill

With only a few weeks left in the year, investors may want to consider a popular strategy known as tax-loss harvesting. The IRS only cares about net trading profits – including stocks, bonds, exchange-traded funds (ETFs), mutual funds, and cryptocurrencies – you can sell an investment at a loss to compensate. investment gains elsewhere or up to $ 3,000 in income. And those losses can be carried forward to offset investment gains in years to come.

However, because the IRS has treated cryptocurrencies as property, the blank sale rule does not apply. This rule states that if you sell an investment at a loss, the IRS does not allow you to recognize the loss for tax purposes if you redeem it, or an “essentially identical” asset, within 30 days. Savvy crypto investors have found a tax loophole: a similar exchange, which allows you to sell a coin at a loss and instantly redeem it, Keller says. If passed, a bill who is currently working through the US Congress could enforce the wash-sell rule in crypto, he adds.

“This may be the last year that people can take advantage of this advantage,” Keller said, adding that most investors probably don’t have a lot of crypto-related losses to reap right now, as there are so many coins. are close to their historic peaks.

As the IRS continues to assess how to deal with cryptocurrencies, investors may be on the “honor code” to accurately declare all of their tax implications, Greene-Lewis says. Keller adds, “My recommendation is to take the most conservative tax treatment possible. ”

More money :

Coinbase for Beginners: A Complete Guide to Buying and Selling Cryptocurrencies on a Popular Exchange

What is Bitcoin and how does it work?

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