Second, <\/strong>transactions are fast and simple. That\u2019s because they move between individuals, not institutions. <\/p>\n And third,<\/strong> crypto transactions are cheaper because there is no middleman collecting a fee.<\/p>\n But there was another quality to cryptocurrencies that seemed particularly\u2026intriguing. Since cryptocurrency isn\u2019t regulated and doesn\u2019t pass through the usual bureaucratic chain, it just might be the perfect payment system to avoid income taxes.<\/em><\/p>\n At least, that was the thinking at the time, and there was some merit to it. After all, cryptos were a mere bug on the wall of the financial universe. They were barely drawing any attention from the tax authorities, especially the IRS.<\/p>\n But that was a long time ago, at least in terms of modern investing, and much has changed. Cryptos have grown in popularity and value, and they\u2019ve gone mainstream. Prices for Bitcoin are now tracked and reported regularly by the major financial media.<\/p>\n More important, cryptocurrency is no longer being ignored by the IRS. That being the case, you\u2019ll need to be aware of the impact of taxes on your cryptocurrency transactions.<\/p>\n Even though the IRS treatment of cryptos is still evolving, it should now be obvious that the Tax Man is actively tracking crypto activity. The best strategy for crypto investors is to become educated and be ready to play by the rules.<\/p>\n But what are those rules?<\/p>\n As I said, the IRS is still developing strategies for handling crypto transactions. But before we get into the questions, I need to advise you that I\u2019m a certified financial planner, not a CPA or tax attorney. <\/p>\n That means I\u2019m not an expert on taxes, so you\u2019ll want to consult a tax professional with any questions specific to your personal circumstances.<\/p>\n With that said, I\u2019m going to do my best to spell out what we do know about the IRS treatment of crypto transactions, at least up to this point.<\/p>\n Let\u2019s cover seven common cryptocurrency questions.<\/strong><\/p>\n<\/p>\n I\u2019ll get right to the point\u2014absolutely! The IRS has even gotten serious about targeting undeclared crypto earnings. They initiated a program\u2014Operation Hidden Treasure<\/a>\u2014to track down crypto activity. And they are warning taxpayers that crypto transactions are not anonymous<\/em>.<\/p>\n If your crypto trading is taking place on an IRS-compliant broker, like Robinhood<\/strong><\/a>, you\u2019ll receive a 1099-B<\/strong><\/a> from the broker reporting your crypto activities.<\/p>\n But let\u2019s say you\u2019re using an exchange, one that is not IRS compliant and doesn\u2019t provide a 1099-B. You should know that you are not relieved of the tax liability. You\u2019ll need to keep your own records of crypto transactions and report them to the IRS.<\/p>\n Just as you would with the profits on the sale of securities, like stocks and bonds<\/a>, you\u2019ll need to report and pay tax on any gains on the sale of cryptocurrency. They\u2019ll need to be reported on your tax return. <\/p>\n You can report them on Schedule D, Capital Gains and Losses<\/strong><\/a> when you file your individual income tax return.<\/p>\n I\u2019ll get into how much you\u2019ll owe on your crypto capital gains in Question #3 below.<\/p>\n Nope, no taxes are due because no gains are realized or recognized\u2014for tax purposes, at least\u2014until the asset has been sold. All that has happened is an increase in the market value of your crypto, which is not taxable.<\/p>\n The answer to this question will depend on whether the gain is the result of a short-term capital gain or a long-term capital gain. <\/p>\n Short-term capital gains are gains on the sale of securities or other assets that occur in one year or less. Long-term capital gains are those that occur in more than one year.<\/p>\n That\u2019s an important fact to be aware of because the tax rates for short-term gains are much higher than they are for long-term gains.<\/p>\n Long-term capital gains have a maximum rate of 20%<\/a>, and that\u2019s only if your income is greater than $441,450 if you\u2019re single or $496,600 if you\u2019re married, filing jointly. <\/p>\n But if your income is less than $80,000 per year, you may owe zero capital gains tax (amounts over $80,000, but less than the threshold above, are generally taxed at 15%).<\/p>\n Short-term capital gains are subject to your ordinary income tax rate. Depending on your income, that can be anywhere from 10% to as much as 37%.<\/p>\n That doesn\u2019t necessarily mean short-term capital gains are a bad situation. You\u2019re paying tax on a profit. You\u2019ll pay tax based on your highest marginal tax rate. I would have to pay 37% based on my tax bracket. But I\u2019d rather take the profit and pay the tax than take a loss.<\/p>\n The income you earn from lending cryptocurrency is treated like interest for tax purposes. This is similar to the interest you can earn on high-yield savings accounts<\/strong><\/a>. It will be entered on your income tax return and taxable at ordinary income tax rates.<\/p>\n The IRS does have provisions for like-kind exchanges that enable you to defer capital gains. A 1035 exchange<\/a> applies to life insurance policies<\/a> and annuities<\/a>, while a 1031 exchange<\/a> can be used for real estate. <\/p>\n Basically, either exchange enables you to replace one asset with a comparable asset and defer taxes until the second asset has been sold.<\/p>\n But this is not the case with cryptos. You\u2019ll need to pay tax on any gains you earn, regardless of what you do with the proceeds.<\/p>\n Big Brother is always watching! Even if you\u2019re trading crypto on a non-IRS-compliant exchange, the IRS will still know you\u2019ve invested money in that exchange when you transfer money from your U.S. bank account to the exchange.<\/p>\n Large or frequent transfers can tip them off that you\u2019ve been very active with crypto investing. Cryptocurrency isn\u2019t nearly as anonymous as it was when it first came out. As it\u2019s grown in popularity, the IRS and other government agencies are increasingly tracking the activity.<\/p>\n This can happen if you exchange, say, Bitcoin for Dogecoin or Ethereum or for one of several different stablecoins.<\/p>\n Let\u2019s say you buy Bitcoin for $10,000, and it rises to $50,000. You then exchange your Bitcoin for an equivalent amount of Ethereum. Unfortunately, that is a taxable event.<\/em><\/p>\n Even though the crypto universe views it as an exchange between two cryptos, the IRS will see it as selling one crypto for another.<\/p>\n You\u2019ll need to recognize a taxable gain in your Bitcoin of $40,000, which is the $50,000 sale price, less your $10,000 initial investment. Whether you sell the Bitcoin for U.S. dollars or for another crypto, you\u2019ll need to declare the gain on the Bitcoin sale.<\/p>\n While I was addressing the questions above, I thought of a few more that might be helpful in handling your crypto trades for tax purposes.<\/p>\n For example, let\u2019s say you bought Bitcoin when was $3,000, then again when it was $50,000. The price goes to $60,000, and you decide to sell. Is the gain based on the $3,000 purchase or the $50,000 purchase?<\/p>\n For tax purposes, gains are recognized on a first-in, first-out (FIFO) basis. That means the gain would first need to be recognized on the $3,000 purchase, which would, of course, result in a much larger capital gain at $57,000 ($60,000 \u2212 $3,000).<\/p>\n The sale of the $50,000 purchase at $60,000 would result in a $10,000 capital gain. But the gain on the $3,000 purchase would need to be recognized first.<\/p>\n Stablecoin is a type of crypto where the value is tied to the dollar or some other recognized world currency. That\u2019s why these coins are referred to as stable.<\/p>\n The same rules apply to the exchange of any crypto for stablecoin as they do for exchanging for another crypto. You\u2019ll need to recognize the gain on the sale of the crypto at the time of the exchange for the stablecoin.<\/p>\n Once again, it doesn\u2019t matter if your crypto is sold for cash or exchanged for another crypto. The gain on the crypto you\u2019ve disposed of will be taxable.<\/p>\n Whether you sell crypto through a broker or an exchange\u2014even one based outside the U.S.\u2014doesn\u2019t change the tax consequences of the transaction. All the rules stated above will apply.<\/p>\n The main difference is that a broker like Robinhood, which is US-based and therefore US tax compliant, will issue a 1099-B<\/a>, while the noncompliant crypto exchange will require that you maintain records and report your transactions from those records.<\/p>\nTable of Contents<\/h3>\n<\/div>\n
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Cryptocurrency and Taxes<\/strong><\/h2>\n
7 Common Cryptocurrency Tax Questions<\/strong><\/h2>\n<\/p>\n
1. Are My Cryptocurrency Transactions Taxable, and Do I Need to Report Them to the IRS?<\/strong><\/h3>\n
2. Do I Have to Pay Tax on Increases in the Value of My Cryptocurrency if I Don\u2019t Sell It?<\/strong><\/h3>\n
3. How Much Tax Will I Owe on a Gain?<\/strong><\/h3>\n
4. What Is the Tax Treatment if I Am Lending Online Cryptocurrency?<\/strong><\/h3>\n
5. Can I Reinvest My Cryptocurrency Gains to Defer Capital Gains Taxes?<\/strong><\/h3>\n
6. Will the IRS Know About My Cryptocurrency Activities?<\/strong><\/h3>\n
7. What if I Exchange My Cryptocurrency for Another One \u2013 Do I Still Owe Tax?<\/strong><\/h3>\n
![\"\"](\"http:\/\/www.petermaneurope.com\/wp-content\/uploads\/2021\/08\/Common-Cryptocurrency-Tax-Questions-1024x730-1.png\")
<\/figure>\nMiscellaneous Crypto Tax Questions<\/strong><\/h2>\n
What Is the Order of Cryptocurrency Sales of Multiple Crypto Purchases?<\/strong><\/h3>\n
Do the Tax Rules for Crypto Exchanges Change if the Exchange Is for a Stablecoin?<\/strong><\/h3>\n
Is There Any Difference Between Buying and Selling Crypto With a Broker Like Robinhood, Which Doesn\u2019t Have Its Own Digital Wallet, and Through a Crypto Exchange That Does?<\/strong><\/h3>\n