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How Is Crypto Taxed?

In this article, we'll focus on US laws and the crypto taxes that the IRS enforces. Here is what you should know about taxes applicable to the crypto world!
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You should always strive to do business legally, and that involves paying relevant taxes.  If you plan on investing in crypto, you should be aware most countries have applicable taxes to this industry. The tax laws and rates vary significantly, so it’s vital to check your local regulations.

In this article, we’ll focus on US laws and the crypto taxes that the IRS enforces. Here is what you should know about taxes applicable to the crypto world!

Do You Pay Taxes on Crypto?

The United States regulations consider cryptocurrency as a type of property. You can own it, which means it’s subject to taxation. The important thing to note is that you need to pay taxes on any gains you make in a crypto market. That means purchasing crypto isn’t subject to taxation itself. So, when do taxes apply to cryptocurrencies?

If you acquire crypto, you get a property. Let’s say the value of the currency you buy is $700. The changes in value while you hold the crypto don’t matter as long as it’s in your possession. Now, let’s say you sell the currency for $1,000. That means you profited $300, and that will be the taxable amount.

The IRS puts a lot of effort into enforcing tax compliance. While filing your taxes, you’ll need to state if you participated in any digital currency transactions. There’s a separate form for those who had over $20K or more than 200 transactions in that year. Even some crypto exchanges monitor their clients and report those who are above these limits to the IRS.

How Is Crypto Taxed

Apart from profiting when selling crypto, here is what might be subject to taxes:

  • Getting crypto as a payment form for offering a service
  • Earning from staking crypto
  • Earning from mining crypto
  • Getting interests from lending crypto

What Are the Cryptocurrency Tax Rates for 2021?

We need to distinguish between short and long-term capital gains. Short-term gains come from those assets you owned for less than a year. They don’t have special tax brackets, which means the rates are the same as for any ordinary income.

This is an overview of short-term gain brackets:

Applicable Tax Single Head of the Household Filing Jointly with a Married Partner
10% Up to $9.95K Up to $19.9K Up to $14.2K
12% $9.95K-$40.52K $19.9K-$81K $14.2K-$54.2K
22% $40.52K-$86.37K $81K-$172.7K $54.2K-$86.35K
24% $86.37K-$164.9K $172.7K-$329.8K $86.35K-$164.9K
32% $164.9K-$209.4K $329.85K-$418.85K $164.9K-$209.4K
35% $209.4K-$523.6K $418.85K-$628.3K $209.4K-$523.6K
37% More than $523.6K More than $628.3K More than $523.6K

Long-term gains offer favorable rates that don’t go above 20%:

Applicable Tax Single Head of the Household Filing Jointly with a Married Partner
0% Up to $40.4K Up to $80.8K Up to $80.8K
15% $40.4K-$445.85K $54.1K-$473.75K $80.8K-$501.6K
20% More than $445.85K More than $473.75 More than $501.6

How to Determine If You Owe Crypto Taxes

Here are some examples of when you need to pay taxes:

  • You sold crypto and received fiat money.
  • Someone paid you crypto because you provided services or goods.
  • You traded crypto and earned from it.

If you earned from your moves in the crypto industry, you need to report taxes. So, if you earn from a trade, you need to report gains in USD.

Different Ways to Legally Avoid Taxes on Cryptocurrency

As long as you keep everything legal, there are tricks to apply to lower or avoid taxes on crypto. Here are some expert tips in this area:

  • Keep your crypto for a while. That ensures you move from short-term to long-term gains, which can secure favorable tax rates.
  • Lower taxes by using losses. If you had losses on some crypto trades, it could help to offset gains. For example, you could have profited $8K but lost $5K on transactions. That means the sum you’ll report will be $3K.
  • Aim to sell when you have low incomes throughout the year. If the year hasn’t been that successful, you can consider selling some crypto. It ensures you don’t go into a higher tax bracket, which helps to save some money.
  • Gift crypto to your family. There are no taxes on gifts, and you’ll offset gains. Please note that the maximum gift you can give to someone shouldn’t exceed $15K per year.

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