Everything you need to know about how crypto is taxed

From 2020 onwards, taxpayers in the US have been required to check a box on their tax returns indicating if they have engaged in any taxable events involving cryptocurrency.

Some users may believe crypto to be anonymous and that they can get away with not reporting any realized crypto gains, but this simply isn't true. Blockchain activity is stored on a public ledger that can be accessed by anyone. And while some wallet addresses may not be tied to a user's identity (unless the wallet is hosted on an exchange), it's still possible to determine who is behind specific crypto transactions.

Blockchain analysis is becoming more advanced, thanks to data analytics tools powered by artificial intelligence. Naturally, tax agencies are investing in such technology. It would therefore be unwise to assume that you can get away with not paying cryptocurrency taxes.

Mark Kang, cryptocurrency tax expert and Cointelli CEO, said that "the IRS has already outlined its taxation policies for crypto assets. Some exchanges, like Coinbase, have been reporting their users' transactions to the IRS on a yearly basis via forms 1099-K, 1099-MISC, and 1099-B."

And beginning with the 2023 tax year, Kang added, "every crypto exchange will be required to issue Form 1099-B. It is therefore only a matter of time until those who have not yet voluntarily filed tax returns will face penalties."

How cryptocurrency is treated for tax purposes

In 2014, the IRS issued IRS Notice 2014-21, IRB 2014-16. This makes cryptocurrency subject to capital gains tax in a similar way to stocks and bonds, declaring the currency to be a form of property. It also categorically answers the question "is cryptocurrency taxed?" for US taxpayers.

The IRS defined virtual currency as a "digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value." Bitcoin and other cryptocurrencies are considered "convertible" virtual currencies, meaning they can easily be converted into US dollars or other fiat currencies. Transactions involving convertible virtual currencies often trigger a taxable event. 

For full details of how the IRS answers the question "is cryptocurrency taxed," see "Section 4 — Frequently Asked Questions" at this link.

What are taxable events for crypto?

A discussion of how cryptocurrency is taxed wouldn't be complete without mentioning specific taxable events for crypto.

Any sale of crypto can be treated as a taxable event. There are also many other transactions that could be taxable, such as:

• Airdrops
• Hard forks
• Crypto earned from mining or staking, or lending
• Crypto earned in exchange for providing a service

In cases where a user obtains cryptocurrency through methods that don't involve buying, the crypto is generally treated as income and requires tax to be paid on its entire value at the time of receipt. Token swaps can also be taxable events.

Using crypto to purchase goods or services also counts as a taxable event. These instances are treated as though a user sold their cryptocurrency for fiat and used that to buy something. For example, if someone bought $100 worth of DOGE, which then became worth $200, and then they spent that $200 on a product or service, they would owe capital gains tax on the realized profit of $100.

The above covers many of the most common taxable events in the crypto sphere.

Calculating taxes when you buy and sell cryptocurrency: Short-term vs. long-term

The two main pieces of information needed to calculate the taxes owed due to buying and selling cryptocurrency are:

• Net proceeds vs cost basis
• Length of time the asset was held

These will determine the amount of gains an investor owes tax on, as well as whether those profits fall under short-term or long-term capital gains tax rates.

Assets held for less than or equal to 365 days are subject to short-term gains or losses, while those held for more than one year fall under the long-term category.

Short-term capital gains rates tend to be higher and fall into one of seven tax brackets ranging from 10% to 37%. Long-term capital gains rates tend to be lower and fall into one of three tax brackets — either 0%, 15%, or 20%, depending on an investor's income.

It should be clear by now that keeping track of all these transactions, and calculating their cost basis and the taxes owed, is no easy task for the ordinary cryptocurrency user.

How to make it simple

If all of this sounds complicated, that's because it is. Unless you do nothing more than buy crypto without ever selling it, you will, in all likelihood, have triggered some taxable events.

Thankfully, solutions have been developed that make the process of calculating crypto taxes much easier.

There's a variety of crypto tax solutions available. Most of them are rather basic and can collect your trades into a .CSV file for you. But many of these programs may miss important information and result in inaccurate calculations. They can also be difficult to use for people without expert knowledge.

Cointelli is built by CPAs, and tracks, records, and calculates all the information needed for crypto tax preparation. Its proprietary software uses APIs to gather data from the blockchain and determines what is taxable, what taxes are due, and at what rates. This allows a user's capital gains and losses to be tallied quickly and accurately.

Among other useful features, Cointelli offers users:

• A user-friendly interface
• Accurate, reliable reporting
• A simple, step-by-step process
• High import success rate
• Automatic detection of issues in imported data
• Easy-to-read reports that can be sent straight to an accountant or tax service
• Round-the-clock customer support from real people 

Check out Cointelli today and see just how easy calculating your crypto taxes can be.

This article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own professional tax advisor for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

This article was created by Cointelli with Insider Studios.