Cryptocurrency is no longer a niche product. Crypto investments are now one of the hottest trends for businesses of all sizes — and the IRS has taken note. Crypto taxes regulations can be complicated and confusing, but you definitely need to report your crypto gains. Here’s a look at what happens if you don’t report cryptocurrency on taxes — along with answers to common crypto tax questions.
What Happens if You Don’t Report Cryptocurrency on Taxes?
The IRS doesn’t recognize cryptocurrencies as fiat currencies like the US dollar and the Euro. Instead, the IRS classifies them as digital assets. Therefore, crypto is subject to capital gains taxation, just like other capital assets such as equities, real estate, and bonds.
That means you must disclose any cryptocurrency trading activity conducted over the past year on your tax return. If you don’t, you’re subject to the same civil and criminal liabilities for not reporting capital gains.
The anonymous and decentralized nature of blockchains have led many to believe their crypto trades are hidden from the government. As many IRS audits and prosecutions have shown, this is not the case.
Blockchains are simply decentralized public ledgers, which can be viewed by anyone. Once a digital wallet’s address is matched to a person or business, all trading activity can be identified.
Bitcoin Tax Rate: What You Need to Know
As the popularity of cryptocurrency grows, so does the scrutiny of tax authorities. The Bitcoin tax rate depends on the holding period of the cryptocurrency and the taxpayer’s income tax bracket.
Another important factor to consider is the reporting requirements for cryptocurrency transactions. Taxpayers are required to report all cryptocurrency transactions, including buying, selling, and trading, on their tax returns. Failure to report these transactions can result in penalties and interest.
Understanding the Bitcoin tax rate and reporting requirements can help taxpayers avoid penalties and stay compliant with the IRS.
Do You have to pay taxes on cryptocurrency gains?
Cryptocurrency is taxed at the same rates as other capital gains. For businesses, capital gains tax rates are equal to the normal corporate income tax rate.
Of course, nothing is ever simple in the world of income taxation. How to report capital gains tax on cryptocurrency depends on your business entity type, and whether it’s a short-term or long-term capital gain.
A short-term capital gain comes from the sale of assets owned for one year or less. A long-term capital gain results from the sale of assets owned for more than one year, with a typically lower tax rate.
How Do Businesses Report Capital Gains Tax on Cryptocurrency?
- If you do business as an individual, such crypto income should be reported on your Form 1040—aka your personal income tax return. It’s taxable at ordinary income tax rates—plus self-employment taxes. Capital gains taxes are in line with your tax bracket, with rates from 10% to 37% on short-term gains and 0%,15% or 20% on long-term gains (depending on the amount of gains and your filing status).
- For owners of a partnership or an S corp, remember that income gets passed-through to your Form 1040, so your share of the crypto income is taxable to you at ordinary income tax rates—plus self-employment taxes. Short-term and long-term capital gains are again dependent on your individual tax bracket.
- As a C corp, the crypto income is taxable—to your C corp—at ordinary tax rates which are currently 21% plus possible state income taxation.
The following states have no state income taxes, and therefore no state capital gains taxes:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Among the other 41 states, some are more favorable to capital gains than others. You should consult your tax preparer about any state capital gains tax liabilities in your state.
How to Avoid Capital Gains Tax on Cryptocurrency
Cryptocurrency investors and traders may be looking for ways to avoid tax liability on gains from cryptocurrency transactions. While it’s not possible to completely avoid capital gains tax, there are some strategies that taxpayers can use to reduce their tax burden.
One strategy is to hold onto your cryptocurrency for more than a year before selling it. As mentioned earlier, gains from the sale of cryptocurrency held for over a year are taxed at a lower rate compared to gains from the sale of cryptocurrency held for less than a year. By holding onto your cryptocurrency for the long-term, you can take advantage of the lower tax rate and reduce your tax liability.
Another strategy is to offset gains with losses. If you have losses from other investments, you can use them to offset gains from cryptocurrency transactions. This strategy, known as tax-loss harvesting, can help reduce your overall tax liability.
Charitable donations can also provide tax benefits for cryptocurrency investors. Donating cryptocurrency directly to a charity or non-profit organization can provide a tax deduction for the fair market value of the donated cryptocurrency. This strategy can help reduce your tax liability while supporting a good cause.
Lastly, taxpayers can also consider moving their cryptocurrency into a self-directed IRA. By doing so, they can defer taxes on gains until retirement when they may be in a lower tax bracket. This strategy can also provide additional benefits, such as asset protection and estate planning.
How Do I Avoid Double Taxation of Crypto?
The IRS generally treats crypto held by a business similar to stocks or mutual funds— an investment asset. When you buy crypto or receive it as business income, basis is created. The purpose of basis is to make sure you don’t pay tax on the same thing twice, thereby avoiding double taxation on your gain.
Here’s an example:
You bought $100 of crypto then later sold it for $120. You got $120 of cash, but it’s assumed you’ve already paid taxes on the original $100, so that $100 is not taxable income. Because you sold it for $120 at a basis of $100, $20 is taxed as a capital gain. In the case where you sell for less than basis, like $90 for instance, you’d have a capital loss of $10.
Now let’s take the example of crypto received as income for services rendered. You received $500 worth of crypto, which would be taxable as ordinary income. The crypto’s basis is also $500. This is the basics of basis and how capital gains and losses are calculated.
inDinero is Here For Help With Crypto Taxes
At inDinero, we know taxes in and out and we’re here to help with all your tax concerns and questions. Get in touch with our team of tax experts today to help you take the cryptic out of crypto taxation.
Quick Note: This article is provided for informational purposes only, and is not legal, financial, accounting, or tax advice. You should consult appropriate professionals for advice on your specific crypto tax situation. inDinero assumes no liability for actions taken in reliance upon the information contained herein.
I'm an enthusiast with a comprehensive understanding of cryptocurrency and tax regulations. Having delved deep into the intricacies of the crypto space, I can provide invaluable insights into the implications of not reporting cryptocurrency on taxes and the associated consequences. My expertise extends to the nuanced aspects of crypto taxation, including the classification of cryptocurrencies as digital assets and their treatment under capital gains taxation.
The IRS's recognition of cryptocurrencies as digital assets rather than fiat currencies, like the US dollar or Euro, is a pivotal aspect that forms the basis of crypto tax regulations. I am well-versed in the implications of this classification, which subjects crypto to capital gains taxation, akin to traditional capital assets such as equities, real estate, and bonds. This means that reporting cryptocurrency trading activities on tax returns is imperative, and failure to do so incurs both civil and criminal liabilities.
One common misconception surrounding crypto is its perceived anonymity due to the decentralized nature of blockchains. Drawing upon my knowledge, I can debunk this myth by highlighting that blockchains are decentralized public ledgers accessible to anyone. As demonstrated by numerous IRS audits and prosecutions, the traceability of digital wallet addresses to individuals or businesses allows authorities to identify all trading activities.
Moving on to the Bitcoin tax rate, I can elucidate on how it varies based on the holding period of the cryptocurrency and the taxpayer's income tax bracket. Additionally, I can provide insights into the reporting requirements for cryptocurrency transactions and the potential penalties and interest for non-compliance.
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