Crypto Tax 101: Unlocking Capital Gain Tax on Crypto

Sonic Team

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Date of publishing : Feb 13, 2023 , 10:14 AM

A lot of people wonder if they need to pay taxes on their investments when it comes to crypto. There's a question that many people ask: Is the tax treatment of cryptocurrencies different from the treatment of ordinary currency? And the short answer is – yes.

In this blog post, you'll learn when you're liable to pay crypto tax and how your transactions might affect your taxes. Let's go.

FYI: This is not Tax advice. This blog post reflects our stance on IRS guidelines, which may evolve and change over time. It is vital to Sonic Wallet that our readers have pertinent information at their fingertips in the most convenient manner possible. Please consult a tax specialist about your specific tax situation.

Am I liable to pay crypto tax?

As Bitcoin and other digital currencies are considered property for tax purposes, people may be subject to either income tax or capital gains tax. The crypto tax you'll have to pay is determined by the sort of transactions you make with your cryptocurrencies. We'll have a look at both.

To determine if you're liable to pay crypto tax would depend on how you utilize your cryptocurrency. We've divided both into two categories: taxable events and Non-taxable events. Let us dissect them:

Taxable events: Taxable events are those in which you're liable to pay crypto taxes. The such event includes the following

Selling cryptocurrency for fiat: Did you sell your cryptocurrency for US dollars? If you sell your crypto for more than you bought for them, you're liable to pay taxes. You may be able to deduct a loss from your taxes if you sell at a loss.

Swapping one cryptocurrency to another: If you use bitcoin to purchase Ethereum, for example, you must technically sell your bitcoin before purchasing the new asset. The IRS deems this to be taxable since it is a sale. If you trade your bitcoin for more than you bought for it, you'll have to pay taxes on the difference.

Earning in cryptocurrency: If you were paid in cryptocurrency by your employer, your cryptocurrency will be taxed as compensation based on your income tax bracket.

Accepting cryptocurrency in return for products or services: If you take cryptocurrency in exchange for a good or service, you must declare it to the IRS as income.

Mining cryptocurrency: If you mine cryptocurrency, you would be liable to pay crypto tax on your gains based on the fair market value (typically the price) of the mined coins at the time they were received. Cryptomined for profit is taxed as self-employment income.

Earning staking rewards: Like mining revenues, staking awards are taxed depending on the fair market value of your earnings on the day you got them.

Other sources of income: You might get a return by owning specific cryptocurrencies, such as USD Coins. This is regarded as taxable income. Although this is commonly referred to as interest, the IRS treats it differently than bank interest.

Obtaining crypto through a hard fork: Taxes on crypto obtained through a hard fork vary depending on how you utilize the asset when it is available for withdrawal from your exchange, and other factors.

Receiving an airdrop: Airdrops may be sent by a cryptocurrency firm as part of a marketing campaign or giveaway. Receiving an airdrop is considered income, and you must disclose the amount on your taxes. Check out the most recent IRS advice on airdrops.

Purchasing cryptocurrency using cash and Hodling: Buying and holding cryptocurrency is not taxed in and of itself. When you sell, the tax is frequently imposed, and the gains are "realized."

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Donating cryptocurrency to a tax-exempt charity or non-profit: You may be eligible to claim a charitable deduction if you donate cryptocurrency directly to a 501(c)(3) nonprofit organization, such as GiveCrypto.org.

Gifting: What a lovely gesture! You can give up to $15,000 per recipient each year tax-free (and higher amounts to spouses). If the value of your gift exceeds $15,000 per recipient, you must file a gift tax return. If you transfer cryptocurrency to someone else without purchasing goods or services, it may be considered a gift, even if you didn't want it to be.

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Transferring cryptocurrency to yourself: Transferring cryptocurrency between wallets or accounts owned by you is not taxed. You can carry over your original cost basis and acquisition date to continue tracking your possible tax effect when you sell.

Crypto tax is also split into two sections

Short-term capital gains: Profits from a cryptocurrency asset held for less than a year are taxed at the same rate as your income tax bracket. Any losses can be utilized to reduce income tax by up to $3,000. Any additional losses will be carried forward.

Long-term capital gains: The capital gains tax on crypto assets held for more than a year is substantially lower; 0%, 15%, or 20% tax based on individual or combined marital income.

How to file crypto tax in the US?

Preparing and submitting your cryptocurrency taxes may be a time-consuming procedure, especially if you've never done it before. The first step is to compile all of your crypto transactions, which is both the most crucial and time-consuming element of the filing procedure.

Some people may just need to log one or two exchanges. However, it can be a daunting process for more experienced investors who have played in NFTs, yield farming, airdrops, and other sorts of crypto trading. That's why it's typically a good idea to maintain track of your trades throughout the tax year to avoid having to complete it all at once.

After completing the first step, you must compute any capital gains and losses. Several systems can do this for you, some of which provide free trials and may supply all you need to move on to the next phase.

Following that, you must complete Form 8949 and attach it to Form Schedule D. Any crypto assets earned as income must be reported on Schedule 1 of Form 1040, and self-employment earnings from crypto must be reported on Schedule C.

Finally, submit your documents and pay the taxes.