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Cryptocurrency Tax Guide in the USA

October 29, 2022

Whether you’re just getting your feet wet in the cryptocurrency world or you’ve been playing with digital currencies for a while, it’s beneficial to be mindful of how you might be taxed on your crypto gains. With many options available for payment, it can become difficult to know which one is most beneficial for filing your taxes.

It’s undoubtedly everyone’s favorite time of year if you’re reading this: tax season. As you work through your tax bill, you may come across several forms and reports that attempt to record how you utilized your cryptocurrency – whether you sold, staked, or HODLed.

Do you have to pay crypto taxes?
In the United States, cryptocurrency is classified as a digital asset. The IRS treats it similarly to stocks, bonds, and other capital assets. Like these assets, the money you make from cryptocurrency is taxed differently. It can be taxed either as capital gains or as income. This will depend on how you received it and how long you keep it.

To determine if you owe taxes, consider how you utilized your cryptocurrency over the preceding fiscal year. Taxable events are transactions that result in a tax. Those that do not are referred to as non-taxable events.

Methods to File Cryptocurrency Tax
As of the 2022 tax year, this is the method you would file your crypto taxes:

  1. If you are a US citizen or resident alien, you will claim cryptocurrency as a capital asset. This is done via IRS Form 8949. The gains and losses from these transactions should be reported on Schedule D of Form 1040, along with a note indicating understanding that it’s levied tax at a 32% rate in the US.
  2. If you are in the United States, Canada or Mexico , you’ll want to report your crypto gains on Form 8949 as well as Schedule D of each return for the year where you have made transactions. With the gains and losses reported on Schedule D, you’ll pay a tax of 20% on your taxable income from the cryptocurrency. If your gains exceed your losses, you’ll be able to take a deduction against it at either 10% or 25% depending on your tax bracket.
  3. or, you’ll want to report your crypto gains on Form 8949 as well as Schedule D of each return for the year where you have made transactions. With the gains and losses reported on Schedule D, you’ll pay a tax of 20% on your taxable income from the cryptocurrency. If your gains exceed your losses, you’ll be able to take a deduction against it at either 10% or 25% depending on your tax bracket. If you live in Mexico or Canada , the IRS will only be able to obtain information regarding your gains and losses if you are trading your cryptocurrency for fiat currency. Otherwise, it’s not reported on any form or schedule.
  4. or, the IRS will only be able to obtain information regarding your gains and losses if you are trading your cryptocurrency for fiat currency. Otherwise, it’s not reported on any form or schedule. If you are a foreign citizen and have gained by trading crypto for crypto, be sure that wherever you’re from recognizes transactions in digital currencies as valid forms of exchange before reporting on any forms or schedules. If you cannot properly document your trades, this signifies that you are not paying tax on the gains derived from them.

IRS Approach On Crypto Tax
With the IRS’ recent filing requirements on crypto, it’s clear that they have their eye on every crypto portfolio involved in capital transactions. While the information is still limited for now, it’s most likely that these new developments will give rise to more concrete support for crypto taxation in the future.

Even for the most experienced tax professionals, determining what you owe on your crypto assets can be difficult. Let’s break through a few standard forms to assist you prevent any problems. We’ll go over each document, why you got it, and when you’ll need it.

IRS Forms
Cryptocurrency can be taxed in two ways: as income (a federal tax on money earned) or as capital gain (a federal tax on the profits you made from selling certain assets). When the IRS requires it, the cryptocurrency exchange or broker you use must report certain types of activity directly to the IRS on certain forms and provide you with a copy. You must also record any taxable actions on these forms to the IRS on your tax return as a taxpayer.

1099-MISC
If you earned more than $600 in cryptocurrency, we must disclose your transactions to the IRS as “miscellaneous income” on Form 1099-MISC – and so must you. Even if your staking or incentives money falls below the $600 threshold, you must still disclose it on your tax return. At the moment, you only submit Form 1099-MISC to the IRS, but because crypto tax rules are still a little hazy, more IRS forms may be available on other crypto exchanges.

Calculating Cryptocurrency Income
If you live in the United States, you’re probably used to seeing your federal and state income taxes deducted from your pay stubs. The cryptocurrency you receive as income (such as mining, staking, and rewards) is likewise subject to these income taxes, which are frequently not deducted or withheld. When you submit your wages, you’ll normally owe the income tax rate that corresponds to your tax bracket. A word of caution: If you’ve made a lot of money through cryptocurrency, it may impact your tax bracket. You may end yourself paying a higher tax rate on some of your earnings.

Recognize Your Capital Losses
When you sell an asset for less than what you purchased for it, you have incurred a capital loss. However, losses can be used to your advantage. You can utilize losses to offset any capital gains. This includes those from non-crypto assets you may have had throughout the year, thus lowering your overall tax payment.

If you have more losses than profits or no gains at all, the most you can declare each year to offset other income is $3,000. Any remaining amount is carried over to following years until the entire amount of the loss is applied.

If you are looking to file your crypto tax without any headache then you should try using an online service like Binocs. This platform will automatically calculate tax and file it on time without any penalty.

[The Daily CPA]