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How To Tax Cryptocurrency In 2022: A Complete Guide

How To Tax Cryptocurrency In 2022: A Complete Guide

2021 was a banner year for cryptocurrency, with laser eyes and all-time highs. If you’re one of the 10% of Americans who traded cryptocurrency in the last year, you’re undoubtedly wondering how your transactions and other crypto activity will affect your taxes. 

Crypto sales, conversions, payments, and income must all be reported to the IRS and state tax authorities when appropriate, and each of these transactions has its own set of tax ramifications. Well, this might seem quite confusing. This article will walk you through all you need to know about crypto trading and income taxes. You’ll discover how to submit crypto taxes, as well as crypto tax rates and other key aspects concerning this complicated topic. Let’s begin.

Do You Need To Pay Crypto Taxes in the USA?

In the United States, you will be taxed on cryptocurrency profits. Short-term capital gains and crypto income are subject to a 37 percent tax, while long-term capital gains are taxed at a rate ranging from 0% to 20%.

Cryptocurrency is subject to taxation. The IRS considers cryptocurrency to be property, and transactions involving cryptocurrency are taxable under the law the same as transactions involving other kinds of property.

When you sell, trade, or dispose of bitcoin in any way and make a profit, you must pay taxes. You must pay taxes on $500 of your cryptocurrency profit, for instance, if you acquire $1,000 and then sell it for $1,500. You can deduct a loss on your taxes if you sell cryptocurrencies and lose money.

The purchase of cryptocurrency itself is not considered a taxable event. Even if the value rises, you can buy and hold bitcoin without paying taxes. First, there must be a taxable event, such as the sale of the bitcoin.

The Internal Revenue Service has taken steps to ensure that cryptocurrency investors pay their taxes. Tax filers must respond to a question on Form 1040 inquiring if they had any form of virtual currency transaction during the year. For clients who have more than 200 transactions and $20,000 in trading over the year, crypto exchanges are required to file a 1099-K.

How Much Is The 2022 Crypto Tax Rate?

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The amount of tax you pay on cryptocurrency is determined by your income, tax filing status, and the length of time you possessed it before selling it. You pay short-term gains taxes, which are the same as income taxes if you own it for fewer than 365 days. If you’ve owned it for a longer period of time, you’ll have to pay long-term capital gains taxes.

In order to keep up with inflation, the IRS altered the tax brackets for 2022. The following are the long-term cryptocurrency tax rates that will be in effect when you file your tax return in 2022:

Tax Rate

Single

Married Filing Jointly

Head of Household

0%

$0-$41,675

$0-$83,350

$0-$55,800

15%

$40,676-$459,750

$83,351-$517,200

$55,801-$488,500

20%

>$459,750

>$517,200

>$488,500

As previously stated, short-term crypto gains are taxed as conventional income by the IRS. The following are the tax rates that will apply to gains on crypto held for fewer than 365 days in 2022:

Tax Rate

Single

Married Filing Jointly

Head of Household

10%

$0-$10,275

$0-$20,550

$0-$14,650

12%

$10,276-$41,775

$20,551-$83,550

$14,651-$55,900

22%

$41,776-$89,075

$83,551-$178,150

$55,901-$89,050

24%

$89,076-$170,050

$178,151-$340,100

$89,051-$170,050

32%

$170,051-$215,950

$340,101-$431,900

$170,051-$215,950

35%

$215,951-$539,900

$431,901-$647,850

$215,951-$539,900

37%

>$539,900

>$647,850

>$539,900

Therefore, these are the crypto tax rates according to which you need to pay taxes in the USA. Now, the question arises: how to know if you owe crypto taxes? Let’s see.

How IRS Can Track Crypto?

IRS can easily track crypto by following the below-mentioned steps:

  • KYC (Know Your Customer) checks are now required for all major cryptocurrency exchanges.
  • Exchanges process financial data and accept fiat payments in exchange for cryptocurrency.
  • Many exchanges also keep track of the crypto addresses to which you’ve sent money, allowing them to identify custodial wallets.
  • The IRS and users receive 1099 forms from several exchanges.
  • Coinbase, Kraken, and Poloniex have all been ordered by the IRS to provide user data.

How is Crypto Taxed in the USA?

Because Bitcoin and other cryptocurrencies are considered property for tax purposes, they may be subject to either income tax or capital gains tax.

The bitcoin tax you’ll have to pay is determined by the sort of crypto transactions you make. Let us take a look at both of them.

  • Capital Gains Tax

Because crypto is treated as a capital asset for tax purposes, you’ll have to pay Capital Gains Tax if you sell it. In the United States, you have three options for getting rid of your cryptocurrency:

  • Cryptocurrency is being exchanged for fiat currency.
  • Trading one cryptocurrency for another.
  • Using cryptocurrency to purchase products or services.

You won’t have to pay Capital Gains Tax on the entire proceeds of a crypto sale; just any capital gain (profit) would be taxed.

Calculation of Capital Gains

The difference in value between when you bought your cryptocurrency and when you sold it is known as a capital gain or loss. You’ll have a capital gain or loss whenever you sell, trade, or spend your cryptocurrency. You’ll have a capital gain if you made a profit on your crypto disposal. You’ll have a capital loss if you lost money on your crypto disposal.

It’s simple enough to figure out your crypto capital gains and losses. To begin, you must determine your cost base. Your cost basis refers to the price you paid for your crypto asset, including any transaction costs. If you obtained the cryptocurrency for free – for example, if it was a gift – you’ll use the fair market value of that cryptocurrency asset in USD on the day you received it.

Cost Basis = Coin cost of crypto + Brokerage or Transaction Fees

Once you’ve determined your cost basis, just subtract it from the asset’s value on the day you sold it to determine whether you made a profit or a loss.

Capital Gain / Loss = Value at Disposal – Cost Basis

If you make a profit, you must pay Capital Gains Tax on it. You won’t have to pay Capital Gains Tax if you incur a loss, but you should keep note of them because you can use them to offset gains (more on this later).

  • Crypto Income Tax

Let’s look at when your cryptocurrency might be taxed as income instead of capital gains now that we’ve covered capital gains. Many crypto transactions can be considered income and subject to income taxation. The simplest way to think about it is that each time you’re ‘earning’ crypto, it’ll be taxed as income rather than capital gains.

The IRS has a lot of information on when cryptocurrency is considered income rather than capital gain. This includes the following:

  • Getting paid in cryptocurrencies.
  • Cryptocurrency mining as a pastime.
  • If you are getting an airdrop.
  • Getting fresh coins as a result of a hard fork.
  • Staking pays off.
  • Bonuses for referring others.

In recent years, various earn-to-engage sites have sprung up, where the crypto you receive can be considered income. As previously stated, there is currently no IRS advice on the tax implications of many of these transactions, particularly newer DeFi protocols. However, because obtaining crypto through staking and mining is considered money, earning crypto through these other sites is very likely to be deemed income as well. For personalized counsel on these assets, speak with a crypto tax accountant. The following are some examples of prospective crypto income:

  • Binance Referral offers referral bonuses.
  • Learn how to earn money by participating in programs like Coinbase Learning Center or
  • The CoinMarketCap Learning Center is a resource for those interested in learning more about cryptocurrency.
  • Keep an eye out for platforms like Odysee that can help you earn money.
  • Explore earning systems such as the Permission.io browser plugin and the Brave browser.
  • Play games like Axie Infinity to earn money.
  • Using browser extensions like Lolli, you may make money by shopping.
  • On platforms like Moon Faucet, you can make money by sharing your public address.

However, paying taxes on crypto may seem expensive. Let’s see how you can speculate on crypto prices.

How To Speculate On Crypto Prices?

Well, there are two main ways to speculate on crypto prices. Either you can trade them through a broker or can buy and own them through an exchange. 

  • With crypto brokers, you will get a chance to find various derivative products. Crypto trading on derivates implies that you do not actually own the coins. Instead, you simply speculate on the pricing moment.  
  • Alternatively, buying cryptocurrencies from an exchange means you own and hold the crypto coins. There are currently three types of exchanges that you can opt to buy: centralized or CEX, decentralized or DEX, and hybrid. 

However, as you know about price speculation by a brokerage and exchange, let’s see what types of coins you can owe.

Types of Coins

While many crypto users are aware of and appreciate these distinctions, traders and non-technical investors may be unaware of them because all types of tokens tend to trade in the same way on crypto exchanges. The types of coins include

  • Ethereum (ETH)
  • Litecoin (LTC)
  • Cardano (ADA)
  • Polkadot (DOT)
  • Bitcoin Cash (BCH)
  • Stellar (XLM)
  • Dogecoin (DOGE)
  • Binance Coin (BNB)
  • Tether (USDT)
  • Monero (XMR)

Therefore, these are the types of crypto coins that you can opt buying. Now, the question arises: how to know do you owe crypto taxes or not? Let’s see.

How To Know Do You Owe Crypto Taxes?

If you spend your cryptocurrency and its value has increased since you got it, you owe crypto taxes. The following are the many sorts of taxable events associated with cryptocurrency transactions:

  • In exchange for fiat cash, you can sell your cryptocurrency.
  • Buying products or services with cryptocurrencies
  • Different types of cryptocurrencies can be traded.

Only if the value of your cryptocurrency has increased is this a taxable event. To determine if you must pay crypto taxes, you must determine your cost basis, which is the entire amount you paid to obtain your crypto. After you compare the price, you compare it to the price at which you sold the crypto or the amount you received after you used it.

Let’s say you’ve already bought one Bitcoin for $20,000. The following examples show when bitcoin purchases are taxable:

  • You’d report $30,000 in gains if you sold one Bitcoin for $50,000.
  • You’d report $25,000 in gains if you used one Bitcoin to buy a $45,000 automobile.
  • You’d report $40,000 in gains if you traded one Bitcoin for $60,000 in another cryptocurrency.

Crypto taxes become tricky when coins are traded. A cryptocurrency transaction is a taxable event. You must disclose any gains in US dollars on your tax return if you trade one cryptocurrency for another.

When trading cryptocurrencies, you must keep track of how much money you have won or lost in US dollars. You’ll be able to appropriately report your cryptocurrency gains and losses this way. If you’d rather keep things simple, bitcoin stocks may make tracking gains and losses easier than purchasing and selling individual coins.

Therefore, this is how you can determine your eligibility for crypto taxes. Now let’s see when you have to pay crypto taxes in the USA

When Do You Need To Pay Crypto Taxes In The USA?

Cryptocurrency-related capital gains tax events include:

  • Buying cryptocurrency with fiat currency (U.S. dollar, Japanese yen, etc.).
  • Bitcoin as a gift (any amount over $15,000 in the tax year 2021).
  • Even modest purchases, such as buying a cup of coffee, can be made with bitcoin.
  • A digital asset swap occurs when one digital asset is exchanged for another. This includes utilizing cryptocurrency to buy NFTs.

It’s worth remembering that you only have to pay taxes on any capital gains you make as a result of these occurrences, not the entire value of the assets you’ve sold. This is determined as the difference between the asset’s purchase price and its sale price.

Tax events include the following:

  • Receiving cryptocurrency via an airdrop is known as an airdrop.
  • Any interest revenues from DeFi lending in crypto.
  • Cryptocurrency mining revenue is generated by block rewards and transaction fees.
  • Liquidity pools and interest-bearing accounts generate cryptocurrency.
  • Paying for services rendered with cryptocurrencies, such as bug bounties. 

Trading losses can be used to offset capital gains and deduct up to $3,000 from your regular income tax, depending on how long you’ve owned the assets (see below). Any excess losses can be carried over to the following year’s tax return. It is necessary to demonstrate that you have suffered a loss across all assets in a certain class to qualify for a capital gains reduction. Let’s explore some most commonly asked conditions while paying crypto tax in the USA:

Do you need to pay tax while buying crypto?

Both yes and no. Whether or not you’ll have to pay tax depends on what you’re buying your crypto with. Let’s take a closer look at it now.

  • Purchasing cryptocurrency with US dollars

When you buy crypto in the US with fiat cash, such as the US dollar, you are not taxed.

However, it’s critical that you maintain track of your cryptocurrency transactions. This is so that you can keep a complete record of your cost base and precisely calculate your crypto capital gains and losses when you sell crypto assets later.

  • Buy and HODL Crypto

HODLer? Good news: even if the value of your crypto increases, you won’t have to pay tax if you’re just buying and HODLing it. Only when you sell, trade, or spend will you have a taxable event.

Do you need to pay tax while swapping crypto?

Swapping one cryptocurrency for another in the hopes of avoiding paying taxes? Reconsider your position. It is taxable to exchange crypto for crypto.

Buying bitcoin with another cryptocurrency, such as ETH with BTC, is a taxable event in the United States. The IRS considers these to be two distinct transactions. Let’s say you wish to buy ETH with BC in the example above.

This is interpreted by the IRS as you selling your BTC. After that, you’re purchasing ETH at market value. You must pay tax on the selling of the BTC, not the purchase of the ETH, even though you never received any fiat currency.

Do you need to pay tax while selling crypto?

Yes, you will be taxed if you sell cryptocurrency in the United States. However, the amount you pay will vary depending on how long you’ve owned the asset and how much money you make on a regular basis. Short-term Capital Gains Tax applies to crypto held for less than a year, whereas long-term Capital Gains Tax applies to crypto held for more than a year.

  • Cryptocurrency exchange for US dollars

According to the IRS, selling crypto for fiat currency such as USD is a taxable event. You’ll have to pay short-term Capital Gains Tax if you sell your crypto asset for fiat cash after possessing it for less than a year. This will be taxed at the same rate as your personal income tax. You’ll have to pay long-term Capital Gains Tax if you sell your crypto asset for fiat cash after possessing it for more than a year. The amount you pay will vary depending on your monthly income, but you may expect to pay anywhere from 0% to 20%.

  • Selling cryptocurrency for cryptocurrency

Selling your cryptocurrency for another cryptocurrency is the same as selling it for fiat currency. It makes no difference which cryptocurrency you sell it for – stable coins or altcoins – it’s still a taxable event. Any financial gain you make from the transaction will be subject to short or long-term capital gains tax.

Do you need to pay tax while transferring crypto?

The IRS has verified that moving cryptocurrency between your own wallets isn’t considered disposal, and you don’t have to record it or pay Capital Gains Tax on it. However, nothing is simple in the realm of crypto, and activities such as adding and removing liquidity may become more complicated from a tax standpoint.

Also, there is a condition that all crypto transactions are not taxable in the USA. 

Tax-Free Crypto Transactions

You’ll be relieved to learn that not all crypto transactions are taxed in the United States. You won’t have to pay tax on cryptocurrency if you:

  • Purchase cryptocurrency with fiat money.
  • Cryptocurrency HODLing
  • Transferring cryptocurrency between your own wallets.
  • If you haven’t surpassed the lifetime gift limit, you can gift crypto.
  • Donating cryptocurrency to a good cause.
  • Making an NFT is the first step.

How To Calculate Your Crypto Taxes?

Calculating your crypto taxes takes time, especially if you deal in large volumes. You can do it all by hand or use a cryptocurrency tax calculator like Koinly to save time.

Follow these instructions if you wish to manually compute your crypto taxes:

  • Count up all of your taxable cryptocurrency transactions for the entire fiscal year you’re reporting on.
  • Determine whether transactions are taxable under the Income Tax Act and which transactions are taxable under the Capital Gains Act.
  • Using your preferred accounting approach, determine the cost base for each transaction.
  • Calculate your capital gains and losses, as well as your income and costs.

The IRS will therefore require you to disclose all taxable crypto disposals, as well as any income from crypto, as well as the profits from your disposal, and the following capital gain or loss.

Need Assistance With Crypto Taxes?

Team Freecashflow.io has expertise in assisting online business owners to solve tax and accounting-related issues. Some of our colleagues have worked for multibillion-dollar firms such as Warner Brothers, EY, and Paramount Pictures. You can count on us for crypto tax and accounting assistance. Feel free to contact us!

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