In years past, cryptocurrency was not the priority of tax-related governmental agencies. However, a lot has changed since Bitcoin has set new records for investors. That implies that if you did not pay taxes in years past, you are liable to do that now. Agencies like the IRS have cleared up confusing questions about cryptocurrencies. They view cryptocurrencies as capital assets just like stocks or bonds. Since they increase in value, taxing them is the right option. So, how do you calculate taxes on your digital currencies? What software can help you in computing the taxes on your coins? Let’s find out in this article.
HOW IS YOUR CRYPTOCURRENCY TAXED?
Cryptocurrencies are viewed as capital assets that incur profits after a long period. When your coins increase in value after a long time, they develop into what we call capital gains. These capital gains are the liable assets that are subjected to taxes. That is, when you realize profits after selling your invested coins, that profit is liable to taxes. For instance, let’s say you buy BTC at $30,000 and you sell it for $50,000, the taxable amount is the $20,000 gain.
Taxing cryptocurrencies occurs on how long you have held your coins as well as your annual income. In most cases, cryptocurrencies are taxed on the short-term basis or the long-term one. The short-term gains are the coins you own and sell within a period of one year. Meanwhile, the long-term gains are the coins you own and hold for more than a year to incur profits. Most times, short-term gains are taxed at your normal income rate. While the long-term gains are taxed at a lower rate, depending on your annual income.
However, if you sell your invested coins at a loss, your transactions are not liable to taxation. Capital losses are not subjected to taxation. Instead, you can use it to offset other investment gains. For instance, if you purchase BTC at $30,000 and sell it at $25,000, you will owe nothing in taxes but can use the $5,000 loss as a gain to future investments.
WHEN DO YOU PAY TAXES CRYPTOCURRENCIES?
Paying taxes on cryptocurrencies depends on how you got it or how you spend it. Different events arouse the need for payment of taxes. Here are some events that incur taxes on your coins.
- MINING CRYPTOCURRENCY
Mining involves solving complicated equations and recording data on the blockchain network in exchange for new tokens. Therefore, you get taxed as a result of the entire value you have acquired. The mined coins get taxed as self-employment income.
- SELLING CRYPTO
When you sell digital currencies for profit, you get taxed depending on how long you have held the coins. It can be on a short-term or long-term tax rate.
- SWAPPING CRYPTOS
When you exchange one cryptocurrency for another, swapping takes place. When this transaction takes place, you owe taxes for any gains earned during the process.
- WHEN SPENDING CRYPTOCURRENCY
You pay tax based on the price of the cryoto when you make a specific purchase. Meaning, if your crypto provides you with a greater value than the initial price, you owe income tax.
- AIRDROPS, BONUSES, OR SIGN UP PERKS
When you get coins as a bonus for signing up on a new exchange, it is liable to taxation. If you also receive coins via airdrops, it is qualified as a taxable income.
HOW TO CALCULATE CRYPTO TAXES?
From the core, calculating crypto taxes involves noting the original price of a certain crypto, and then calculating the gain or loss incurred. However, it becomes more complex when you have multiple cost bases for a lot of cryptocurrencies you sell. For instance, if you buy the same crypto at different prices within three years, which cost basis do you use to calculate your taxes?
In situations like this, accounting methods such as FIFO, LIFO, and Minimization determine the cost basis to use. One could choose the first purchase to determine your profits or loss within those three years. Besides, using a crypto tax calculator could help in getting the right answer. With a tax calculator, you get answers to complex calculations.
BEST CRYPTO TAX SOFTWARE
Crypto tax softwares is unique in its functionalities. They have different features, perform different functions to suit the needs of their clients. While some are incorporated with exchange platforms, others aren’t. Besides, they charge different subscription fees in using their services. In 2021, here is the list of some crypto tax software you can use.
Choosing the appropriate one for your needs is of utmost benefit to you.
Calculating taxes on crypto is integral in your trading activities. Whether you are a trader, long hodler, or an investor, you need to determine whether you are getting the right satisfaction or not. However, if you encounter any complex calculations, you can make use of the crypto tax software to automatically give you answers. If you have any questions that aren’t answered yet, then getting a tax expert can be the right choice for you.