According to the Pew Research Center, 16% of U.S. adults now say they have invested in, traded or otherwise used cryptocurrencies.
“For years people almost thought of this as play money, and haven’t been so diligent about reporting it,” says Kelly Phillips Erb, a tax attorney and publisher of the site Taxgirl.com. “The IRS is super-serious about it now.”
If you held that position for less than a year, you will have short-term capital gains. Short-term capital gains are taxed at your marginal rate (which is 24% for most taxpayers). However, if you held the investment for longer than a year, and it was “qualifying” (your ordinary income), your tax bracket is 0%, 15%, or 20%, depending on your income level.
Individuals trading digital assets must keep records of the profits they make on each transaction, as those profits and losses are counted as capital gains or losses and may be taxable. Those who trade crypto through registered exchanges should receive an annual statement from the exchange summarizing their trading activity for the previous year, making it easier to report their crypto gains accurately. If you do not trade through a registered exchange, however, be sure to maintain good records of your trades to ensure that you accurately record your capital gains or losses.
Complications may arise when crypto is used both to pay salaries or for goods/services. In such cases, the crypto is treated as a form of ordinary income, with values based on the closing market price of the day it was received.
DO YOUR HOMEWORK
The IRS has published answers to frequently asked questions about crypto assets and a basic explainer. They have also released a roundup of publications related to the subject. Additionally, exchanges such as Robinhood and Coinbase offer their users helpful tax resources.
GIFTING STRATEGIES
If you are trying to make a profit on cryptocurrency without paying taxes, your best bet is to give it away. In the US, an individual can gift up to $15,000 per year without incurring taxes. Although, technically speaking, charitable organizations are not allowed to sell goods and services for crypto donations in most states, but some groups have found ways around that.
USE LOSSES
Cryptocurrency is an unpredictable asset class, and you might lose money when buying or selling it. If you have lost money, you can take those losses as tax deductions. You are allowed to deduct capital losses from any capital gains you make during the year, or from your earned income.