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Crypto Tax Preparation

Cryptocurrency, such as Bitcoin and Ethereum, have captured the investing world’s attention the past two years. With many new investors buying for the first time, it’s important to understand crypto tax implications and how crypto is taxed.

What Is Cryptocurrency? 

Cryptocurrency is a form of currency that only exists digitally and relies on encryption for the security of transactions. This makes it incredibly secure, but also:

  • Irreversible: Once a transaction is confirmed, it can’t be reversed. If you accidentally send your money to someone in error, or if the funds are stolen, your funds can’t be replaced. 
  • International: Regardless of location, your funds can be sent anywhere in the world in just minutes. 
  • Secure: Cryptocurrency is locked in a public key cryptography system, so only the owner of the private key can send cryptocurrency. 

Do You Have To Pay Taxes on Cryptocurrency?

Short answer: It depends.

Taxpayers are required to pay taxes on cryptocurrency when they sell, trade, use, or dispose of cryptocurrency in any way and recognize a gain.

When selling crypto, converting crypto to fiat currency (US Dollars), or exchanging one crypto token for another, it’s treated as capital gains or losses.

Simply buying crypto on its own would not be considered a taxable event. Taxpayers can buy and hold cryptocurrency, even if the value increases, without any taxes.

Taxpayers may “stake” their cryptocurrency to earn rewards over time. Staking is a process where you own cryptocurrency and allow it to work on the blockchain. The taxation of staking awards is currently under scrutiny in the Courts. The IRS believes staking is taxable and would give rise to ordinary income.

Also, some platforms provide awards for simply watching videos regarding cryptocurrency. After watching the videos, taxpayers are provided cryptocurrency in their account which is taxable to them when credited. This income, however, is considered ordinary income.

Still, other taxpayers have decided to enter the cryptocurrency industry as miners. Miners generate coins which are taxable when they have unfettered access to the awards and are typically also subject to self-employment tax. However, the costs incurred with mining could be deductible to offset any income received from the mining process.

How Is Cryptocurrency Taxed?

Cryptocurrency is currently treated as property and general tax principles applicable to property transactions apply to transactions using cryptocurrency. For example, cryptocurrency is taxed in the same way as any other assets you may own, like stocks.

When crypto is received in exchange for products or services, or as salary, the taxation is treated as ordinary income, based on the fair market value at the time of receipt.

The amount of time you hold cryptocurrency can also determine the taxation for short-term vs. long-term gains.

  • Crypto owned for 365 days or less: Short-term gains taxes (equal to income taxes)
  • Crypto owned for more than 365 days: Long-term gains taxes

Also, the net investment income tax of 3.8% applies to the gains on sales or exchanges of cryptocurrency for individual taxpayers who have adjusted gross income great than $250,000 (MFJ) and $200,000 (single).

Crypto Tax Rates for 2021 Tax Year

Tax Rates on Long-Term Gains for the 2021 Tax Year

Tax RateSingleMarried Filing JointlyHead of Household
0%$0-$40,400$0-$80,800$0-$54,100
15%$40,401-$445,850$80,801-$501,600$54,101-$473,750
20%>$445,850>$501,600>$473,750
Source: IRS

Tax Rates on Short-Term Gains for the 2021 Tax Year

Tax RateSingleMarried Filing JointlyHead of Household
10%$0-$9,950$0-$19,900$0-$14,200
12%$9,951-$40,525$19,901-$81,050$14,201-$54,200
22%$40,526-$86,375$81,051-$172,750$54,201-$86,350
24%$86,376-$164,925$172,751-$329,850$86,351-$164,900
32%$164,926-$209,425$329,851-$418,850$164,901-$209,400
35%$209,426-$523,600$418,851-$628,300$209,401-$523,600
37%>$523,600>$628,300>$523,600
Source: IRS

Crypto Tax Rates for 2022 Tax Year

Due to inflation, the IRS adjusted the tax brackets for 2022. Below are the tax rates that will apply when you file your 2022 tax return.

Tax Rates on Long-Term Gains for the 2022 Tax Year

Tax RateSingleMarried Filing JointlyHead of Household
0%$0-$41,675$0-$83,350$0-$55,800
15%$40,676-$459,750$83,351-$517,200$55,801-$488,500
20%>$459,750>$517,200>$488,500
Source: IRS

Tax Rates on Short-Term Gains for the 2022 Tax Year

Tax RateSingleMarried Filing JointlyHead of Household
10%$0-$10,275$0-$20,550$0-$14,650
12%$10,276-$41,775$20,551-$83,550$14,651-$55,900
22%$41,776-$89,075$83,551-$178,150$55,901-$89,050
24%$89,076-$170,050$178,151-$340,100$89,051-$170,050
32%$170,051-$215,950$340,101-$431,900$170,051-$215,950
35%$215,951-$539,900$431,901-$647,850$215,951-$539,900
37%>$539,900>$647,850>$539,900
Source: IRS

Reporting Cryptocurrency on Your Taxes

Crypto exchange platforms typically allow taxpayers to download a transaction report, including all of their buys, sells, and exchanges of cryptocurrency in their account. This may make the reporting process relatively easy. Taxpayers that have crypto on mutliple exchange platforms will need to download a transaction report for each platform and enter any pertinent information on their tax return.

Should the platform not provide this information, KRD can provide a list of a few software programs which may assist in obtaining the proper tax documentation required to file your tax returns.

Chicago Crypto Tax Professionals

If you have questions or concerns about the tax implications of your crypto purchases and investments, contact the crypto tax professionals at KRD today at 847-240-1040 or fill out our online contact form.

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