So you made a nice return on your investment. Congratulations, but don’t forget to pay your taxes! Due to the newness of cryptocurrency, many of its investors are still quite young, and many of them are not fully prepared to deal with the tax consequences of trading.
As an investor, it’s vital to know how certain actions will affect you in the long run. So, in this article, we’re about to go over a small portion of what to expect when it comes to paying the tax man after you’ve cashed out your cryptocurrencies.
Investors should be aware that these rules will vary greatly depending on what country you live in. This includes not only the rules on what is taxable but also the percentage that you will be required to pay.
This piece is written based on rules in the United States. You should however not assume that this is an extensive list of your particular requirements, and if you reside in another country, then you might need to consult your local government’s documentation on what is expected of individuals in your country when it comes to taxes.
Be wary, because if you fail to pay your taxes or you mess up certain entries on your documentation that there could be heavy penalties involved. It may be better for you to consult an accountant or other tax professionals for your particular financial needs, but it’s possible to use this article to get an idea of the situation.
Cryptocurrencies are something that most governments have never really seen before. They are both money and an investment, and for that reason, they have trouble figuring out exactly how to tax them.
However, most countries seem to agree that they are something akin to securities or possessions. There are also different ways to acquire cryptocurrencies, but in most cases, taxable events will likely follow these rules.
Investors should be aware that “sold” does not only refer to cashing out a coin or token to your government currency. Many countries such as the United States see crypto to crypto trades as taxable instances as well, and they will expect you to pay a percentage of any gains to them.
For example, if you trade Ethereum for an ERC20 token, then you owe tax on any gains you made on that Ethereum when the swap occurred. If you didn’t make any money on your Ethereum, then you won’t owe any further taxes on that transaction.
In many cases, this will be referred to as a capital gain, and you have to pay the proper capital gains tax amount. The exact amount that you will have to give up will likely vary by your country, your current income status and the number of months that you held the investment.
In the United States there exists both short term and long term percentages on gains. If you hold an investment for under 12 months, then you actually owe the standard income tax rate in your bracket on that investment. Had you held your coins or your tokens for a year or more, then you’ll be privileged to a much lower tax rate.
If you are planning on selling some of your investments, then it’s in your best interest to see exactly how long you’ve had them. You should also know that you might need to prove that you’ve held them for exactly a year, and records from your exchange accounts may be needed for this.
Remember that as an investor you only have to pay for assets that you sell. If you are still holding your cryptocurrencies, then, in this case, you don’t incur taxes on them even if you have made a gain. This is not a taxable event, and it does not need to be reported when you file your taxes with your local government.
What if you earned this crypto rather than purchased it? What then are the rules? In most cases, this is to be calculated as income, and you will be asked to pay the standard income tax rate on the date when you received these coins or tokens were acquired. What types of things could be considered as reportable under this example?
Do you mine cryptocurrencies using your computer? The government considers this income, and they are certain to want their standard share. Make sure to keep records of your expenses so that you only send them what you made a profit on and not what you made before expenses.
Free coins are great, but the government doesn’t think they’re free. These crypto gifts are still subject to taxes. Fortunately though, these taxes are calculated for you at the time of the event, and it’s like that they are worth very little at this moment. (You will still owe capital gains fees as well when you sell them at a later date.)
Do you love POS coins? Well, you owe money on those too. You have generated new coins that you did not have before, and that counts as income. At the time you receive your stakes you’ll need to take note of the value of the coin at that time and pay taxes on it.
Some tokens pay their investors interest for loyally holding on to their tokens. This is also the money you have earned, and it needs to be accounted for.
All of these items will be considered income where your country’s government is concerned, and they will expect you to report this income to them. The percentage you will pay will depend on how much money you have made that year.
Make sure when you’re doing your calculations that you use your complete income amount from all sources because there’s no distinction here. It will all be lumped together, and if you do not calculate it properly, then you could find that you actually belong in a top tier tax bracket, and you may not have enough saved up to cover this fee!
There are several ways that will allow you to lower your liabilities if you’re feeling sad about the amount of your winnings that you will be forced to pay out to your government.
Can you hold off on selling your investment? If that’s a possibility then you can immediately reduce your future debt by dropping into the long-term capital gains territory. This is almost always a significant savings, even 0% depending on what you make at your day job.
In order to pay $0 on your crypto assets you can only claim a small amount per year, and your eligibility will be dependent upon how much your regular income rate is, but even if you are a higher earner, this will definitely be the easiest way to pay less money.
Did you pick a real stinker this year? Since these are counted as securities, you’re allowed to take a write off for a capital loss to make your debt sting a little bit less. Unfortunately, this amount is capped at $3,000. If you took a bigger hit than that, then it won’t help you out as much, but every little bit helps.
If you’re teetering on the brink of being dropped down into a tax bracket with a more favorable tax rate, then you could try to find some other ways to lower your income, at least as far as governments are concerned. In most cases, your capital gains tax rate is based on this, and if you can reduce this, then you’ll be able to take more crypto gains with less taxes.
Some ways to do this are making pre-tax payments to your retirement savings for your job, taking business deductions, making charitable donations or even deferring your earnings until January.
If you are married, and both you and your partner are still filing singly, then could possibly get a better discount if you file together depending on how much money you both make. The allowances for couples are much more generous than they would be for single people, and it is sometimes worth it to consider the possibilities to save some money on your bill if you plan to make a large cash out this year.
In closing, it’s a good idea to keep an eye on your financial events to make certain that you are not cheating yourself out of income. Nobody likes to give the government more money then they have to. By making a thorough plan before you sell your investments, you can make sure that you are putting yourself in the best possible situation.
Unfortunately for cryptocurrency users, the 12 month waiting period for long-term capital gains may as well be an eternity. That means you will need to weigh your choices to see whether you need to sell out of your positions immediately or if it’s best to hold off for a while for a more favorable tax climate.