So you’ve made some money in cryptocurrency! Congrats! Now, unfortunately, you’ve gotta pay taxes on that gain. Today, I’m going to break down how cryptocurrency is taxes and how to prepare for this activity on your taxes.
Let’s begin with it’s preferential tax treatment – the IRS treats Crypto as property meaning if you hold and sell after a 12 months period your gain will be subject to LT capital gains which may have zero to a max of roughly 23.5%. If you buy and sell in less than 12 months, you are subject to ST capital gains which mean you’ll be paying taxes on that sale as ordinary income. Similar to stock and other securities with one exception.
- Earning crypto – This is when you lend out crypto earning interest would be considered as ordinary income
- Crypto mining earning (Schedule C) a return
Up to this point – Crypto traders have been excluded from the wash sale rule. This is an anti-abused rule for tax harvesting which up until this point has only been applicable to equity and options. A wash sale occurs when an investor sells or trades a security at a loss, and within 30 days before or after, buys another one that is substantially similar. The IRS will disallow the loss for tax purposes adding the loss to the cost basis of the new buy. This is a loophole crypto investors can currently take advantage of, but it may not be available for long.
Just recently the house committee on ways and means released a draft tax proposal which would eliminate the crypto wash sale loophole for tax years after 2021. In the bill currencies and digital assets would be subject to the wash sale rule. Why do you ask? To find more tax revenue. Should this bill pass and your activity trading in crypto your tax planning just got a lot more complicated and you should be meeting with your financial advisor and tax professional to understand the ramifications before you unitintiealy cost yourself a lot in taxes.
How to prepare
- Consolidate all historical transactions in one spot. There are platforms that can gather all exchanges or wallets into one reporting system
- Use IRS Form 8949
- Talk to your accountant and make sure they’re up-to-date with crypto as well.
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