Anytime you’re online, or you watch your favorite T.V. show, it feels like cryptocurrency is everywhere. You may already have invested in your favorite cryptocurrencies or have been thinking about finally pulling the trigger on investing in crypto. Whatever the case may be, the fact is that the popularity of cryptocurrency continues to rise. Everything from Ethereum and Bitcoin to more alternative coins such as Dogecoin and even the highly popular Shiba Inu coins continue to be crypto market trendsetters.
No matter how much money you’ve invested and made or lost in cryptocurrency, the IRS still gets their cut of any profits. They are cracking down lately on cryptocurrency tax compliance and filings, so you want to be sure that you understand the ins and outs of crypto and how they affect your taxes.
Today, the friendly tax professionals at Maggi Tax have put together a breakdown of the most essential things you need to know about cryptocurrency and taxes. Inside, you’ll learn how your crypto is taxed and the best way to report your cryptocurrency.
Everything You Need To Know About Crypto And Your Taxes.
One of the biggest attractions and, in some cases, benefits of investing in crypto is that cryptocurrency is decentralized. That’s why so many people have started incorporating crypto into their investment strategies, which makes the answers from the team at Maggi Tax all the more critical.
Do I Need To Report Cryptocurrency On My Taxes?
When it comes to reporting cryptocurrency on your taxes, a good rule of thumb is that if any taxable event occurs, you must report it on your taxes. Taxable events are situations such as a gain in profits. For cryptocurrency, taxable events fall under two categories. The first is considered a capital gains tax, and the second is viewed as an income tax event. But keep in mind that these two events are taxed differently, so it’s incredibly important to know the differences between them.
A Quick Breakdown Of The Taxable Events:
For Capital Gain Tax Events:
This goes into effect when a couple of things happen together or individually, and they include:
- When you sell crypto for fiat currency such as the U.S. dollar or the euro.
- When you use crypto to purchase goods or services.
- When you swap one crypto asset for another.
For Income Tax Events:
Income tax events occur when:
- You earn crypto interest from a decentralized finance organization.
- You receive cryptocurrency through an airdrop.
- You receive payment for goods or services in the form of crypto.
- Earn cryptocurrency mining income due to transaction fees and block rewards.
Keep these things in mind, so you know how to classify your cryptocurrency income and profits on your taxes.
What Is The Tax Rate For Cryptocurrency?
The current federal tax rate for cryptocurrency is the same as you would calculate for the capital gains tax. However, in the 2021 tax year, that rate ranges from 10-37% for short-term capital gains and between 0-20% for long-term capital gains. This is because your cryptocurrency asset gains are calculated in the U.S. through your holding period and your income.
The holding period for your crypto begins the day after you purchase the asset and continues until you trade or cash in the asset. So, the difference between short and long-term capital gains simply depends on how long you’ve had the asset before selling or trading it.
Is Crypto Taxed The Same Way That Stocks Are?
In short, yes. Cryptocurrency is taxed based on a 2014 IRS ruling that requires all cryptocurrencies to be treated as capital assets, the same as stocks and bonds. It’s not treated like a fiat currency. This means that you have to pay taxes anytime you sell your asset at a profit. If you make a profit selling even a portion of your crypto, you will be taxed on the gains.
However, if you are hit with a loss, you won’t owe any taxes on that transaction, but you still have to report the loss to the IRS. This provides a capital loss benefit that can help offset any capital gains on your taxes.
Cryptocurrency can be incredibly confusing when it comes time to file your taxes. The dedicated tax professionals at Maggi Tax are always staying up to date on the latest tax rules and codes regarding your crypto assets, gains, and losses.
If you’re worried about how your crypto investments will impact your taxes this year, be sure to call the friendly tax experts at Maggi Tax today at 813-850-0241!
