The Internal Revenue Service (IRS) has explicitly stated that Bitcoin and all other types of cryptocurrency are to be classified as assets for tax purposes. This way all virtual currency will be treated the same as real estate, stocks or bonds.
In 2019, the second guidance was released by the IRS stating that all crypto traders were obligated to report every crypto transaction, irrespective of the value. They also clearly stated that it is the responsibility of the trader to maintain a record of all cryptocurrencies in their possession which should include the coins invested, sold and used to purchase any goods or services.
What are the Crypto Events Deemed as Taxable?
According to the IRS, the following activities listed below are considered to be taxable events.
- When crypto is traded for fiat currency (USD), it is deemed as a taxable event.
- When crypto is traded for another form of crypto (Bitcoin to Litecoin).
- When using crypto to purchase goods or services.
- When crypto is acquired as a source of income or through mining.
What are the Events Deemed as Non Taxable?
- When crypto is transferred from different exchanges and digital wallets.
- When crypto is obtained as a gift or donation.
- When crypto is purchased with fiat currency, it is not a taxable event as no gains are realized. Capital gains or losses will only occur when the cryptocurrency is used, traded or sold.
What are Short-term and Long-term Capital Gains?
Short-term Capital Gains
Short-term capital gains are taxed according to the same rate of your ordinary income. If you are a trader who has sold any cryptocurrency which was held for less than a year, the profit made is considered to be a short-term capital gain. Depending on the trader’s taxable income, the Bitcoin tax rate ranges between 10% to 37%.
Long-term Capital Gains
Long-term capital gains occur when a trader manages to sell crypto which was held for more than a year. The Bitcoin tax rate on long term gains are 0%, 15% and 20%. However, for high income taxpayers, the tax rate could be as much as 17% of the ordinary income rate.
What are Capital Losses?
Now, a trader will not always endure capital gains, sometimes capital losses will occur. The IRS allows crypto traders to offset their capital loss to reduce the total net tax payable.
For example, let’s say a crypto trader incurs a net loss. The loss amount can be carried over to reduce the trader’s taxable income. However, there is a limit how much can be carried over (not more than $3000 per year).
What are the Bitcoin Tax Rates on Capital Gains?
There are specific Bitcoin tax rates for traders who have incurred long-term capital gains. Depending on the income of the crypto trader, the Bitcoin tax rates will differ, as listed below.
- It will be 0% for taxpayers who are in the 10% to 15% ordinary income tax bracket.
- It will be 15% for taxpayers in the 25% to 35% income tax bracket.
- It will be 20% for taxpayers in the 39.6% income tax bracket.
Few of The Best Bitcoin Tax Calculators Right Now
The IRS has started to crack down on crypto traders who deliberately fail to report their crypto taxes. Many traders who have filed taxes for previous years are unsure of the accuracy of their tax reports, to alleviate this there are now over 3 dozen Bitcoin tax calculators available. The most popular ones along with their main features, are listed below.
ZenLedger was launched in 2017 and is one of the easiest Bitcoin tax calculators to use. It supports over 12 major crypto exchanges and offers some of the best features which are as below.
- Accounting methods such as First In, First Out (FIFO) and Last In, First Out (LIFO).
- Access for Certified Public Accountants (CPA).
- Inclusion of airdrops, forks and any Initial Coin Offerings (ICO).
- Option for Tax loss harvesting.
- TurboTax integration.
- Alerts from Financial Crimes Enforcement Network (FINCen).
ZenLedger does offer a free version but it does not include most features. Their paid version starts from $149 and goes all the way up to $999 per year for their premium version.
TokenTax is quite popular among beginner level crypto traders as well as crypto veterans. Their tax calculator includes a number of useful features that can ensure your crypto taxes are accurately filed. Currently, TokenTax supports over 40 major crypto exchanges. Some of their premium features are as follows.
- Generating Foreign Bank and Financial Accounts (FBAR) reports.
- Any proceeds acquired from Initial Coin Offerings (ICO).
- Accounting methods such as FIFO and LIFO.
- Calculation of depreciation on mining hardware.
- Bitcoin tax rate calculation.
- CSV uploads and manual imports as well as exports for Form 8949.
- Crypto pricing in real-time.
- Calculation on Net Asset Value (NAV).
Unfortunately, TokenTax does not offer a free version. They have a basic version which is $65 and their premium version is $199 per year.
CryptoTrader.Tax was started in 2017. It is considered to be the one stop solution for any crypto trader based in the United States. They currently support over 20 major crypto exchanges and are perfect for new traders who are filing their crypto tax reports for the first time. Some of their stand out features are as follows.
- Short term and long term sales report.
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