What you should know about Cryptocurrency Taxes in 2022 and how to Minimize them

What you should know about Cryptocurrency Taxes in 2022

Do you have any cryptocurrencies? Maybe you bought Bitcoin at $100 a few years ago and chose to cash in this year. Or perhaps you were late to the revolution and acquired some Ethereum, only to sell it for a quick profit. In either case, your bitcoin transaction may have an influence on your tax bill in 2021.

How Do Cryptocurrency Taxes Work?

Cryptocurrencies like Bitcoin and Ethereum are subject to capital gains tax rules, for better or worse. When you sell cryptocurrencies for a profit, the Internal Revenue Service (IRS) considers it a capital asset, and you must pay taxes on it. When you sell traditional investments like stocks or mutual funds at a profit, this is exactly what happens. The amount of capital gains taxes you owe is determined by whether you’ve owned your cryptocurrency for less than a year or more than a year. If you haven’t yet hit the 12-month mark, your profits will be taxed at the short-term capital gains rate, which is the same as your ordinary income tax rate. If you’ve owned your coins for at least a year, you may be eligible for a long-term capital gains rate that is lower than most income taxes, depending on your taxable income. And, just like any other investment that you sell at a loss, if your crypto investment loses value when you sell it, you can claim a capital loss that you can use to offset other income taxes. However, there are a couple of snags with bitcoin taxation.

Crypto Taxes If You Use Cryptocurrency for Purchases

When you buy something with cryptocurrency, it counts as a sale of that cryptocurrency. If the value of your coins has climbed over what you paid for them, you will owe capital gains taxes. You’ll also be responsible for any applicable sales tax.

Crypto Taxes When You Mine Crypto

It counts as part of your ordinary taxable income if you earn cryptocurrency by mining it, or if you receive it as a promotion or payment for goods or services. At your ordinary income tax rate, you owe tax on the entire fair market value of the crypto on the day you got it. And, depending on how long you’ve had the cryptocurrency you mined or earned through these activities, if its value rises and you spend it or sell it later at a profit, you’ll face capital gains taxes on the earnings.

How to File Your Crypto Taxes

It’s never too early to get your crypto taxes in order. The regular Form 1040 tax return now includes a question about whether you used virtual money during the year. If you answered yes, bear the following points in mind: 1. Keep Records of All Transactions Keep track of all your cryptocurrency transactions, including how much you bought for it, how long you had it, and how much you sold it for, as well as receipts for each one. If you transfer coins between offline cold wallets and your account, your crypto exchange may issue a 1099-B to both the IRS and you, but it may not record the cost basis, or the original amount you bought for your crypto. “Software businesses have emerged that will scour the blockchain to discover transfers between your wallets, whether on an exchange or not, and give you reports of all transactions connected to the wallets you give it within a particular tax year,” according to Jon Feldhammer, tax partner at Baker Botts. Tools like Koinly and Cointracker connect to exchanges and crypto wallets to help you keep track of your cryptocurrency transactions and fill out the papers you’ll need to file your cryptocurrency taxes. 2. Fill Out the Proper Tax Forms Once you have a record of your crypto transactions, you’ll need to fill out certain tax forms depending on how you used your crypto: -Form 8949. This form logs every purchase or sale of crypto as an investment. This should include the total number of coins, the date and price you bought, the date and price you sold and your gain or loss for each transaction. -Schedule D. This form summarizes your total capital gains and capital losses from all investments, including crypto. -Schedule C. If you received coins from mining, you need to disclose whether you received them as a business or as a hobby. If you’re running a crypto mining business, you may owe self-employment taxes if your income exceeded your expenses for the year. -Schedule 1. If you report your crypto mining as a hobby, you’d report this income on Line 8 of Schedule 1. You won’t owe self-employment tax, but you become more limited on what you can deduct as an expense. 3. File Your Taxes If you use Koinly or CoinTracker to keep track of your finances, you can link them to your online tax software of choice. Then, to file your overall state and federal tax returns, use the online tax program. TokenTax offers a full range of accounting services to track and prepare both your crypto and normal taxes for individuals searching for a one-stop shop. 4. Hire a Professional Getting ready for bitcoin taxes can be difficult, especially when the regulations governing them are always changing. If you’ve made a significant amount of money through crypto, you should hire a certified public accountant (CPA) that specializes in this type of tax work so the IRS doesn’t come after you later.

How to Minimize Crypto Taxes

If you think you might owe cryptocurrency taxes in the future, here are six ways to help minimize them:

1. Hold Cryptocurrency for the Long-Term

Your gains qualify for the advantageous long-term capital gains rate if you hold a crypto investment for at least one year before selling. This can practically reduce your tax rate, ranging from a maximum rate of 37 percent for short-term gains to a maximum rate of just 20 percent for long-term gains, depending on your taxable income for the year.

2. Offset Gains with Losses

You can take advantage of crypto gains by declaring losses on other investments the same year you realize your profit, just like any other investment. That means you wouldn’t owe any tax if you gained $10,000 selling Bitcoin but lost $10,000 selling Ethereum because you broke even. However, these losses are not limited to other types of cryptocurrencies. Look over the rest of your portfolio to see if there are any other losing assets you may sell to balance your gains if you’re about to cash in a substantial crypto investment. In addition, if you lose significantly more money in a year than you make, you can deduct up to $3,000 in excess losses from your personal income taxes and carry over any unused losses to offset future investment profits.

3. Time Sales with Your Tax Rate

You can always try to wait out a lower tax rate if you have the luxury of time, according to Jeff Hoopes, an associate professor at the University of North Carolina and research director of the UNC Tax Center. “Perhaps you were laid off, retired, returned to school, or relocated to a state with cheaper taxes. “You might then find yourself in a lower tax bracket, allowing you to sell your cryptocurrency while owing less in taxes,” he says.

4. Claim Expenses for Mining

While mining cryptocurrency may appear to be a low-cost pastime in theory, it comes with a slew of costs, including computers, servers, electricity, and internet service provider fees. If you’re a crypto miner, you can deduct these expenses from your earnings, albeit the amount you can deduct will depend on whether your operation is classified as a company or a hobby.

5. Consider Investing Through a Retirement Plan

You can defer or eliminate investment gains entirely if you invest in crypto through a retirement plan like a traditional IRA or Roth IRA, however it’s not as simple as investing through a regular brokerage account. “There are ways to get crypto into tax-advantaged vehicles like an individual retirement plan (IRA),” says Hoopes, “but it is not common or easy (although many expect it to become easier).” If you want to start a crypto or Bitcoin IRA right now, you’ll need to open a self-directed IRA with a boutique firm that specializes in crypto investing.

6. Donate to Charity

If you don’t need all of the profit from your crypto investment, donating at least some of it to charity can help you save money on taxes. You’ll get a tax break equal to the whole amount of your cryptocurrency, including any gains. However, this only makes sense if you were planning on donating to charity anyhow. Source