Tax tips for Crypto Traders
In 2020 and 2021, there was a surge in people buying and selling cryptocurrencies. Some were more ubiquitous like Bitcoin, and others were memecoins or scams. In either case, people who trade crypto do have to pay taxes on any money they make. Here are some general tips for the typical crypto holder:
1. You have to pay taxes on your gains, so keep good records.
You report your crypto sales on Schedule D, which is an attachment to Form 1040, the tax return for individuals. The question is: how much tax do you have to pay on it? Well, it depends. The first question is how much you originally paid for the crypto, because that will help determine your gain or loss.
Let’s say you buy $5,000 of crypto, then sell it after it jumps in value to $10,000. You will only pay taxes on the extra $5,000 in gain. However, if you don’t keep good records, or can’t prove the original value at purchase of the crypto, then the IRS may attempt to force you to pay taxes on all $10,000—doubling your taxes.
The key documents to have during the year are: 1) the date of any purchases and sales; 2) the price paid; 3) the sale price; and 4) any tax forms given to you by your trading platform (e.g., Vanguard, Robinhood, etc.).
Remember, it is your obligation to keep records to prove your positions to the IRS.
2. How long you hold the asset determines the taxes you pay.
Cryptocurrencies receive capital gains treatment (lower tax rates than regular job income) when you hold them for more than a year. However, you pay your normal tax rate if you sell the stock after less than a year. Using the example above, if you bought $5,000 of crypto on January 1, 2020, then sold on January 2, 2021, then you have long term capital gains on the sale—meaning lower taxes. However, if you sold on even December 30, 2020, then you would pay at your normal tax rate.
3. If you receive crypto as compensation for work, you pay taxes on it immediately.
Occasionally, you may have a gig where the employer offers a mix of cash and crypto for the service. If you do work for someone and they pay you with crypto, regardless of the kind of work, then you should save some money to pay taxes on it. In this situation, the crypto is basically like a regular wage. Also, you should keep good records because the person who pays you in crypto has to report those transfers to the IRS, and may also be writing those expenses off on their business.
4. There is no “minimum” dollar amount of trades that you can choose not to report.
Sometimes, like with interest from your bank, you do not actually have to report the income (e.g. if you have $0.50 in interest from your bank). However, with trades, if you have one dollar of gain or loss, you have to report that to the IRS.
5. Use software to keep track of your trades.
If you’re like me, and you had hundreds of exchanges over the year, it would be incredibly difficult to manage the numbers for every trade. I strongly recommend that you pay for a crypto accounting service. The last thing you want is to have to pay your tax professional for 20 hours of piecing together your spreadsheet of trades.
This is obviously not a comprehensive list of potential hurdles for people who trade crypto, but it should send you in the right direction when reporting trades on your taxes.