Welcome to the world of crypto taxes, where investors are finally starting to see black and white rules! It’s crucial to understand the basics of crypto taxes to ensure you stay on the right side of the law, especially since the IRS is looking to crack down on crypto investors moving forward. In this beginner’s guide, we’ll break down the essentials in simple terms, making it easy for you to navigate the sometimes complex world of crypto taxation.
Here are some best practices.
Jaimin Desai is the co-founder of Reconcile, a tax optimization platform helping investors, business owners and high-income earners pay less tax. He’s regularly written for WorkWeek, Bloomberg and CoinDesk.
Know the difference between buying, selling, and exchanging cryptocurrencies. Each type of transaction, particular in DeFi, may have different tax implications.
For example, swapping one cryptocurrency for another is treated as a traditional sale of stock. So just going from BTC to ETH, even without cashing out to USD, still requires you to pay taxes if your BTC has appreciated in value.
Another scenario that causes lots of confusion and pain is airdrops. Airdrops are typically taxed at fair market value of receipt. So if you were airdropped 10 BTC for a total price of $100,000 on November 10, your taxable income would go up by that amount immediately. Even if you sold those 10 BTC the next day for $90,000, you would still report income of $100,000 and a capital loss of $10,000. Since the IRS only allows you to deduct $3,000 of capital losses every year, in this scenario, you can roll over the remaining $7,000 in future years.
Also, the IRS recently announced that they consider staking rewards to be taxable once received. Therefore, if you were awarded 1 ETH last year for $900 but only were able to sell it today (for some technical reason) when the price is closer to $1,800, your taxable income will increase by the latter amount.
Understand the concept of holding periods. The length of time you hold a cryptocurrency can impact your tax rate. Short-term gains (held for longer than a year) are taxed higher than long-term gains (held for less than a year).
If the crypto tax world seems overwhelming, don’t hesitate to…