Confused about crypto taxation? At Taxman Associates, we understand that crypto taxes can be a daunting topic. That’s why we’ve put together the below guide to answer your most frequently asked questions about cryptocurrencies and taxes.
1. Do I Need to Pay Taxes on My Crypto Income?
Yes, you do. The IRS considers it a form of property, subject to ordinary income and capital gains taxes, depending on the transaction type. This means that every time you trade, sell, convert, or stake your crypto, it could trigger a taxable event.
2. What Are Taxable Events?
- Selling cryptocurrency for fiat currency
- Trading one crypto for another, including stable coins
- Using crypto to purchase goods or services
- Earning crypto as income at a job
- Mining crypto
- Receiving staking rewards
- Earning interest through lending protocols
- Receiving new liquidity pool tokens, DeFi or GameFi reward tokens
- Receiving an airdrop, or new crypto from a hard fork
- Referral bonuses, watch-to-earn rewards such as on Coinbase, etc.
3. How Do I Calculate My Cryptocurrency Taxes?
Determining your tax liability can be complex. You’ll need to track the original cost basis of your crypto, any capital gains or losses incurred during transactions, and the holding period. We highly recommend that our crypto clients utilize a crypto tax tracking software, such as Koinly.io, to stay organized. It is always more convenient to maintain contemporaneous records than to reconcile everything later on.
4. Can I Reduce My Tax Liability?
Absolutely! Understanding the specific tax breakpoints for Federal and Washington State capital gains taxes, as well as the net investment income tax, is crucial for managing your tax burden. Additionally, you can employ tax loss harvesting as a tool to manage gains. If your crypto activity constitutes a trade or business, utilizing self-employment retirement accounts can help reduce your taxable income.
5. What Happens If I Don’t Report My Cryptocurrency Transactions?
Failing to report cryptocurrency income can result in penalties, fines, or even an audit. But don’t worry; we’re here to assist you in staying compliant and minimizing potential risks.
Navigating cryptocurrency taxes doesn’t have to be overwhelming. Remember, staying informed and proactive is key. If you find yourself facing a complex crypto situation, please reach out to us. We’re here to help!