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What percent of cryptocurrency profits are taxed

what percent of cryptocurrency profits are taxed

With these types of issues in mind – and understanding the potentially-substantial tax, interest and penalty obligations that come with failing to timely report cryptocurrency transactions – most cryptocurrency investors will benefit greatly from the assistance of an experienced tax lawyer. This is true with regard to prospectively addressing tax reporting issues, retrospectively amending incomplete tax returns, responding to IRS warning letters, and defending against audits and investigations.

An experienced tax lawyer will be able to help you with cryptocurrency-related tax compliance in numerous respects, including:

  • Determining which of your cryptocurrency transactions qualify as “taxable events” that need to be reported to the IRS
  • Determining whether you have any local, state or international tax obligations related to your cryptocurrency investments
  • Assessing your potential exposure and executing an effective strategy with regard to disclosing previously-unreported cryptocurrency transactions
  • Filing all necessary new and amended tax returns
  • Representing you in direct communications with the IRS and other tax authorities, including during tax audits and criminal tax investigations
  • Negotiating offers in compromise and deferred prosecution agreements (if necessary and in your best interests)
  • Developing tax strategies for avoiding future issues at the state, federal and international levels
Contents:

Contact Boston Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group

Have you received an IRS warning letter? Are you concerned about tax consequences related to your cryptocurrency investments? To speak with Boston tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group in confidence, call 617-692-2989 or inquire online now.

Example 3: Cryptocurrency Income Only

Alice receives no employment income. Alice earns $100,000 of cryptocurrency income during the year.

Her total income is $100,000 which she pays tax on at her marginal tax rate. The first $14,000 is taxed at 17.5%, the next $34,000 at 17.5% and so on… She has tax to pay $23,920.

Any signs of progress in the Indian Crypto Market?

The debate concerning cryptocurrency in India dates to 2013. The Reserve Bank of India (RBI) warned trade for virtual currencies at the time. The announcement occurred after digital tokens became a hot topic a few years ago.

However, because banks continued to enable cryptocurrency exchange transactions, the Reserve Bank of India (RBI) issued a circular in 2018 asking commercial and cooperative banks to stop allowing money to be used for cryptocurrency exchanges. The RBI’s cryptocurrency restriction was later removed by the Supreme Court of India in March 2020.

In India, the year 2021 will be remembered as a watershed moment for cryptocurrency. Bans and rules have sparked a firestorm of speculation. An Inter-Ministerial Committee (IMC) has been formed by the government to investigate the issues surrounding digital tokens.

The government has formed an Inter-Ministerial Committee (IMC) to investigate the challenges surrounding digital tokens and recommend appropriate responses. PM Narendra Modi chaired a high-level meeting near the end of the year, during which he stated the government’s strong opposition to cryptocurrency ventures.

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How to determine your cryptocurrency tax obligation

Before you can declare your cryptocurrency to SARS you need to determine under which tax laws it will fall under, either gross income or capital gains.

To better understand which one fits your situation, ask yourself the following questions.

Ask:Gross Income:Capital Gains:Did you acquire cryptocurrency with the intention to actively trade with it?YesNoWas the cryptocurrency acquired as a long-term investment?NoYesDid you keep the cryptocurrency for a few years (generally 3 years)?NoYes

7 things you need to know about cryptocurrency taxes

1. You’ll be asked whether you owned or used cryptocurrency

Your 2021 tax return requires you to state whether you’ve transacted in cryptocurrency. In a clear place near the top, Form 1040 asks, “At any time during 2021, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

So you’re on the hook to answer definitively whether you’ve transacted in cryptocurrency, putting you in a position to potentially lie to the IRS. If you don’t answer honestly, you could be in further legal jeopardy, and the IRS does not look kindly on liars and tax cheats.

However, there is a footnote. In a recent clarification, the IRS said that taxpayers who only purchased virtual currency with real currency were not obligated to answer “yes” to the question.

2. You don’t escape being taxed just because you didn’t get a 1099

With a bank or brokerage, you (and the IRS) will typically get a Form 1099 reporting the income you’ve received during the year. That may not be the case with cryptocurrency, however.

“There isn’t really the same level of reporting yet for cryptocurrency, relative to typical 1099 forms for stocks, interest and other payments,” says Harris. “The IRS doesn’t get great reporting from Coinbase and other exchanges.”

However, a November 2021 law will require greater tax reporting for those in the industry starting on Jan. 1, 2023. The law requires brokers – including controversially, anyone who moves digital assets for another – to report that info to the IRS on a 1099 or similar form.

Opponents say the law would require anyone who moves cryptocurrency, including miners and crypto wallets, to the new rules, including those who have no access to that info. However, lawmakers are already working on a new bill to more narrowly define who the law applies to.

But the lack of a 1099 won’t let you escape any tax liability, and you’ll still have to report your gains and pay tax on them. Still, it’s not all bad news: If you had to take a capital loss, you can deduct that on your return and reduce your taxable income.

3. Just using crypto exposes you to potential tax liability

You might think that if you only use – but not trade – cryptocurrency you’re not liable for taxes.

Not true!

Any time you exchange virtual currency for real currency, goods or services, you may create a tax liability. You’ll create a liability if the price you realize for your cryptocurrency – the value of the good or real currency you receive – is greater than your cost basis in the cryptocurrency. So if you get more value than you put into the cryptocurrency, you’ve got yourself a tax liability.

Of course, you could just as well have a tax loss, if the value of goods, services or real currency is below your cost basis in the cryptocurrency.

In either case, you’ll have to know your cost basis to make the calculation.

It’s important to note that this is not a transaction tax. It’s a capital gains tax – a tax on the realized change in value of the cryptocurrency. And like stock that you buy and hold, if you don’t exchange the cryptocurrency for something else, you haven’t realized a gain or loss.

4. Gains on crypto trading are treated like regular capital gains

So you’ve realized a gain on a profitable trade or purchase? The IRS generally treats gains on cryptocurrency the same way it treats any kind of capital gain.

That is, you’ll pay ordinary tax rates on short-term capital gains (up to 37 percent in 2021 and 2022, depending on your income) for assets held less than a year. But for assets held longer than a year, you’ll pay long-term capital gains tax, likely at a lower rate (0, 15 and 20 percent).

And the same rules for netting capital gains and losses against each other also applies to cryptocurrencies. So you can deduct capital losses and realize a net loss of up to $3,000 each year. If your net losses exceed this amount, you’ll have to carry them over to the next year.

5. Crypto miners may be treated differently from others

Do you mine cryptocurrency as a business? Then you might be able to deduct your expenses, as a typical business would. Your revenue is the value of what you produce.

“If you mine cryptocurrency, you realize income at the fair market value, so that’s your basis in the cryptocurrency,” says Harris. “If this is a trade or business, your expenses may be deductible.”

But that last bit is the key point: You have to be running a trade or business to qualify. You can’t operate your mining rig as a hobby and enjoy the same deductions as an actual business.

6. A gift of crypto is treated the same as other gifts

If you’ve given cryptocurrency to someone, perhaps a younger relative as a way to spark interest, your gift will be treated the same way as any similar gift would be. So it can be subject to the gift tax if it’s over $15,000 in 2021 (or $16,000 in 2022). And if it comes time for the recipient to sell the gift, the cost basis remains the same as the giver’s cost basis.

That said, there are some ways to escape the gift tax, even if you go over the annual threshold, such as taking advantage of the lifetime exemption.

7. Inherited cryptocurrency is treated like other inherited assets

Inherited cryptocurrency is treated like other capital assets that are passed from one generation to another. They may be subject to estate taxes if the estate exceeds certain thresholds ($11.7 million and $12.06 million in 2021 and 2022, respectively).

Like stock, cryptocurrency enjoys a stepped-up cost basis to the fair value on the day of death. So generally, cryptocurrency is treated for most people like a typical capital asset, says Harris.

Cryptocurrency capital gains tax

If you’ve bought a cryptocurrency and held it for an extended period of time before cashing it out back to fiat then you may be liable for capital gains tax.

IncludeDeductProfitLossProceeds from selling cryptocurrency.The base cost of the cryptocurrency. Example: Purchase price and broker fees.Exclude R40,000 of the gain and include 40% of the remainder in your taxable income.Utilise the capital loss against other capital gains from other assets.

Should I use an accountant?

If you’re unsure about how to handle your taxes, speak to an accountant who has experience with cryptocurrencies who can guide you through the process or file your taxes on your behalf. That said, they’re still going to need some kind of paper trail to help you out.

Another solution is to try TurboTax Live Full Service since you’ll get access to a tax expert who can file on your behalf. You can ask them as many questions as you want and you only get charged when you actually file.

How do you report crypto on your taxes?

If you’re like most cryptocurrency investors, you likely have only bought, sold, and traded crypto (i.e. capital gains investing activity) via a cryptocurrency exchange. This crypto income is considered capital gains income and is reported as such.

On the other hand, if you earned cryptocurrency—whether that’s from a job, mining, staking or earning interest rewards—that earned income is generally treated as ordinary income and is reported as such.

We dive into the reporting for each of these income types below.

Reporting crypto capital gains and losses

Your capital gains and losses from your crypto trades get reported on IRS Form 8949.

Form 8949 is the tax form that is used to report the sales and disposals of capital assets, including cryptocurrency. Other capital assets include things like stocks and bonds.

To fill out Form 8949, list all of your cryptocurrency trades, sells, and disposals onto Form 8949 (pictured below) along with the date you acquired the crypto, the date your crypto was sold or traded, your proceeds (Fair Market Value), your cost basis, and your gain or loss for the trade.

Once you have each trade listed, total them up and fill in your net capital gain or loss for the year at the bottom.

For a detailed walkthrough of filling out Form 8949, checkout this blog post: How To Report Cryptocurrency to the IRS with Form 8949.

Reporting crypto ordinary income

Unfortunately, ordinary income doesn’t fall nicely onto one tax form like we saw with capital gains and Form 8949.

The ordinary income you receive from mining, staking, interest accounts, or perhaps crypto you received as payment from a job get reported on different tax forms, depending on the specific situation.

Schedule C – If you earned crypto as a business entity, like receiving payments for a job or running a cryptocurrency mining operation, this is often treated as self-employment income and is reported on Schedule C.

Schedule B – If you earned staking income or interest rewards from lending out your crypto, this income is generally reported on Schedule B.

Schedule 1 – If you earned crypto from airdrops, forks, or other crypto wages and hobby income, this is generally reported on Schedule 1 as other income.

To make things easier for investors, CoinLedger generates a complete income report that is included with your completed crypto tax reports. This report details the US Dollar value of all of your cryptocurrency income events that you received throughout the year: mining, staking, airdrops, and more. This income report can be used to complete your relevant ordinary income tax forms like Schedule 1, Schedule B, and Schedule C.

If you have any questions about how your crypto-related income needs to be reported, feel free to reach our live-chat customer support team via the chat widget on our homepage. We’re happy to answer any of your questions!

For a step-by-step walkthrough of the crypto tax reporting process, checkout our explainer video below.

What happens if you don’t report your crypto taxes?

Intentionally not reporting your cryptocurrency gains, losses, and income on your taxes is considered tax fraud by the IRS.

The IRS can enforce a number of penalties for tax fraud, including criminal prosecution, five years in prison, along with a fine of up to $250,000.

Over the past two years, the IRS has aggressively been cracking down on cryptocurrency tax compliance. The agency has sent tens of thousands of warning and action letters to Coinbase users suspected of inaccurate tax reporting. It has also updated the main US income tax form (1040) to include a question that every US taxpayer must answer under penalty of perjury:

“At any time during 2021, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

With this much scrutiny on the cryptocurrency asset class, it’s likely that we will see audits and criminal tax prosecutions continue to increase as cryptocurrency and bitcoin adoption accelerates.

Warning Letters Sent by the IRS for Cryptocurrency Investors and Bitcoin Investors

On July 26, 2019, the IRS announced that it was sending “education” letters to more than 10,000 cryptocurrency investors. It sent three versions of the letter: Letter 6173, Letter 6174 and Letter 6174-A. According to the IRS, “all three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors.”

If you have received Letter 6173, Letter 6174 or Letter 6174-A, this means that the IRS has identified you as a cryptocurrency investor who may (or may not) have failed to meet your federal tax obligations in one or more prior years. This is most likely the result of Coinbase turning over more than 13,000 investors’ data to the IRS pursuant to a summons and court order. In order to protect yourself, you must respond to the letter appropriately, as failing to do so could lead to a tax audit or criminal tax law investigation.

What do we mean by responding “appropriately”? Your filing obligations will depend on your personal tax filing history and your history of Bitcoin and other cryptocurrency transactions. If you have met your reporting and payment obligations, then you may not need to file an amended return. However, if you have failed to disclose any taxable cryptocurrency transactions to the IRS, you will need to work with Boston tax lawyer Kevin E. Thorn. He can review your returns from prior years, prepare the necessary amended returns, and determine whether any back taxes, interest and penalties are owed.

What is at Risk if You are Being Targeted in a Cryptocurrency Tax Audit or Criminal Tax Fraud Investigation?

If you invest in cryptocurrency and you are a U.S. citizen or resident living in Boston, you have obligations to the IRS. The IRS has clearly stated its position that, under the Internal Revenue Code, “U.S. persons are subject to tax on worldwide income from all sources[,] including transactions involving virtual currency.” You could owe tax obligations to local, state and international taxing authorities as well.

The IRS Criminal Investigation Division has identified cryptocurrency tax fraud as an “ongoing focus area,” and in 2019 the IRS began sending warning letters to Bitcoin and other cryptocurrency investors. If you have received a warning letter from the IRS – and even if you haven’t – you need to be extremely careful to avoid substantial penalties and the potential for criminal prosecution.

How do you calculate your crypto taxes?

To calculate your capital gains and losses from each of your crypto sells, trades, or disposals, you simply apply the formula:

Fair Market Value – Cost Basis = Capital Gain/Loss

What is fair market value?

Fair Market Value is simply the price an asset would sell for on the open market. In the case of cryptocurrency, this is typically the sale price in USD terms.

What is cost basis

Cost Basis represents how much money you put into purchasing your property (i.e. how much it cost you). Cost basis includes purchase price plus all other costs associated with purchasing your cryptocurrency (fees, etc).

From our examples above, it’s easy to see this formula in action. If you buy 1 Litecoin for $250, your cost basis is $250 per Litecoin. If you sell or trade it when it’s worth $400, that $400 is the fair market value. Applying the formula:

$400 (Fair Market Value) – $250 (Cost Basis) = $150 Gain

Fairly straightforward.

Now, let’s dive into a more complex example to see how you would calculate your gains and losses using this same formula when you have a number of transactions instead of just one or two.

How to calculate gains and losses

Say you have the following transaction history on Coinbase:

  • 1/1/21 – Buy 1 BTC for $29,000
  • 2/2/21 – Buy 1 BTC for $36,000
  • 3/3/21 – Buy 1 BTC for $50,000
  • 4/4/21 – Trade 0.5 BTC for 14.5 ETH (0.5 BTC was worth $29,000 at this time)

With this transaction history, you first trigger a taxable event (and thus a capital gain/loss) when you trade 0.5 BTC for 8 ETH. To calculate the gain/loss, you need to subtract your cost basis of 0.5 BTC from the fair market value at the time of the trade.

The question here is, what is your cost basis in the 0.5 BTC that you traded for 8 ETH? After all, you have purchased 3 different bitcoins all at different prices prior to this trade.

To answer this, you have to determine which bitcoin you are disposing of in this scenario.

To determine the order in which you sell various cryptocurrencies, accountants use specific costing methods like First-In First-Out (FIFO) or Last-In First-Out (LIFO). The standard method is First-in First-out.

Understanding accounting methods

These costing methods work exactly how they sound. For First-In First-Out, the asset (or cryptocurrency) that you purchased first is the one that gets sold off first. So you are essentially disposing of your crypto in the same order that you first acquired them.

If we use First-In First Out for our example above, we “sell off” that first bitcoin which was acquired at $29,000 on 1/1/21. The cost basis in this first bitcoin is $29,000, making the cost basis for 0.5 of this BTC $14,500 (0.5 * $29,000).

As denoted in the example, the fair market value at the time of 0.5 BTC at the time of trading was $29,000.

So by applying the formula, we can see that this transaction history triggers a $14,500 capital gain (29,000 – 14,500). This gain gets reported on your taxes and increases your taxable income.

You can learn more about how various costing methods work to calculate your gains and loss for your crypto trades in this blog post: FIFO, LIFO, and HIFO for crypto trading.

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When Do You Have To Pay Taxes on Bitcoin?

Because the IRS treats Bitcoin as a capital asset, it is subject to general tax principles.

If you invest in Bitcoin and then sell or trade it for a higher price than you bought it for, you owe capital gains taxes. If you own Bitcoin and use it to make a purchase, that is also considered selling it, so you will have to pay capital gains taxes if the Bitcoin you own is worth more than what you paid for it when you bought it.

If you’re paid in Bitcoin for goods or services, you must include the fair market value of the Bitcoin you in U.S. dollars in your gross income. Transactions using virtual currency should be reported in U.S. dollars, too.

As with other types of assets, you would acquire them first, often by exchanging cash for the assets. You then own them for a period of time, and you might eventually sell those assets, give them away, trade them, or otherwise dispose of them. Capital gains taxes come due at this point.

Four things may happen if you sell, trade, or no longer own your Bitcoin:

  1. Income is realized from any gain.
  2. Gain is measured by the change in the dollar value between the cost basis or purchase price and the gross proceeds received from the disposition or the selling price.
  3. The tax rate that applies depends on whether the property was held for one year or less (a short-term gain) or for more than a year (a long-term gain).
  4. Disposition of property is reported on your tax return using Schedule D and Form 8949 or Form 4797. These forms require that you “show your math” when you’re calculating a gain or loss. You’ll do your calculations right on the form, per instructions.

Give Up Your US Citizenship

The most dramatic way to stop paying the IRS for your cryptocurrency gains is to give up your US citizenship. Once you expatriate, the IRS no longer has any right to your earnings. Would you give up your citizenship simply to avoid taxation? It’s become a hot topic of late due to excess gains US citizens have pulled in in recent years.

Again, US citizens pay US tax on their capital gains and cryptocurrency gains no matter where they live. If you move to Panama, but keep your US passport, you still pay US tax on your trading profits. The only way to get rid of the IRS forever is to turn in your blue passport.

To give up your US citizenship, you may need to pay anexit taxand must have a second passport in hand before turning in your US travel document. Without a second passport, there’s no way to expatriate from the United States.

You have two choices when it comes to getting a second passport. You can buy one from countries likeMalta($1.2 million),Dominica($120,000) orSt. Lucia($500,000 investment), or you can earn one over time by becoming a resident of a foreign country.

For example, you can become aresident of Panamawith an investment of $20,000. After 5 years of residency, you can apply for citizenship and a second passport. So, you can either buy a passport or earn one through residency.

4 Ways to Pay Zero Tax on Cryptocurrency Gains.

September 9, 2021 – There are 4 ways to stop paying tax on your cryptocurrency gains. If you’re tired of the IRS taking half your short term profits and 20% of your long term gains, here are 4 ways to pay zero tax on cryptocurrency gains without getting in trouble with the IRS.

Note that this article is focused on US citizens and US persons (residents and green card holders). The United States IRS has declared thatcryptocurrency is an assetor property, but not a currency. Therefore gains on cryptocurrency are treated the same as profits from the sale of a stock, rental real estate, or any other passive investment.

If you want to avoid tax on your cryptocurrency profits, you must plan ahead. Here are 4 waysto stop paying tax on your cryptocurrency gains and yourcapital gains.

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