Top 7 Questions About Paying Taxes on Crypto

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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Investors buy various assets, hoping to achieve a return on their investments. Investors eventually realize capital gains by selling their assets and paying the appropriate taxes. For centuries, people have paid capital gains on stocks, real estate, and other asset classes. However, Crypto is a newer asset that is more complicated than other investments.

Cryptocurrencies are decentralized virtual currencies. Some investors think this status lets them escape capital gains taxes. Some consumers prefer using crypto as a payment method for merchants that accept Bitcoin. How do these transactions impact your taxes? Everyone wants to save on taxes, and knowing the rules around crypto can prevent you from making costly mistakes.

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Crypto and Taxes in the U.S.: Overview

The Internal Revenue Service imposes taxes on returns you make from assets. The IRS considers crypto as a digital asset, meaning you will owe taxes on your capital gains. The IRS treats crypto as they would treat stocks and other investments. Your cost basis and selling price impact what you owe in taxes. Cost basis represents the price you purchased crypto, while the selling price indicates the sole price. You will incur capital gains if the selling price exceeds your cost basis. However, you will have net losses if your selling price is less than your cost basis.

Top Questions About Paying Taxes on Crypto

Crypto investors can make a lot of money buying and holding onto virtual currencies. However, not knowing tax laws can hurt your returns. In addition, having less money than anticipated can strain your retirement plans or create pressure on your monthly budget. 

When you know the rules, you also discover the best ways to lower your tax bill. You may feel inspired to set up a crypto IRA, make donations via Bitcoin, and use other strategies to protect your gains. Crypto is a new and promising asset. Taxes aren’t new, but they are as complicated as ever. Mix the two together, and it’s no wonder many people have questions. We have highlighted some frequently asked questions about crypto taxes.

1. Do You Have to Pay Taxes on Crypto in the U.S.?

The IRS will tax you on every possible transaction they can, and crypto is no exception to the rule. The only exception is for Puerto Ricans since it is a U.S. territory. Puerto Ricans pay no taxes on capital gains, dividends, and interest, making it an optimal tax haven for retirees. If you can see yourself moving to Puerto Rico in the future, you may want to hold onto crypto and sell it when you officially become a resident of Puerto Rico. You can sell crypto as a Puerto Rican and immediately rebuy your position to get a fresh start and avoid capital gains. If you don’t want to move to Puerto Rico, you can avoid taxes by investing in an iTrustCapital Crypto IRA.

2. Can the IRS Track Crypto Transactions?

The IRS can track crypto activity. Most cryptocurrency trading platforms report transactions to the IRS, and the IRS can issue a subpoena to exchanges that don’t provide this information. The IRS forced Coinbase to share details and transactions of 13,000 users in 2018. While the IRS originally wanted information about every U.S. user, the courts restricted the IRS to information from 13,000 accounts. 

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3. How Do You Determine If You Owe Taxes on Crypto?

You can check your transaction history to see if you sold any crypto or used it to make a purchase. You will owe taxes on your crypto if your cumulative transactions yield a capital gain. However, you will not owe taxes on those transactions if you have a net loss. Some crypto exchanges provide documents that detail every transaction and do these calculations for you.

4. Is Crypto Income Taxed?

If you receive income as crypto, it gets taxed as ordinary income. So you have to pay taxes on this crypto right away. Investors cannot defer crypto income by holding onto the asset. This rule applies regardless of whether an employer pays you in crypto, you receive crypto for playing a mobile game or a crypto payout via staking.

5. Do You Have to Pay Capital Gains on Crypto?

Almost everyone has to pay capital gains on their crypto. The only two exceptions revolve around location and income. If you do not live in Puerto Rico or didn’t purchase your crypto through a Roth IRA, you will owe capital gains based on your tax bracket. Tax brackets can change each year and depend on your income. Holding onto crypto for over 365 days results in a more favorable long-term capital gains tax rate. You may owe zero capital gains taxes if your income is low enough. Some investors intentionally wait to sell their assets until after they retire to capitalize on these savings.

6. How Do You Report Cryptocurrency on Your Taxes?

You can use Form 1099 to report crypto taxes, but you have to keep track of the cost basis and selling prices. Not every broker provides you with a form. This can come as a shock to any stock investor who is familiar with receiving a 1099-B form from their broker each year. Brokers who do not provide a form may have dashboards that let you view past transactions. You owe taxes on your crypto and have to mention them on your tax returns even if your broker does not offer a completed form.  

While keeping track of your transactions and reporting them can create headaches, they won’t last long. The IRS will require crypto brokers to provide users with 1099-B forms in 2023. These forms will detail your transactions and list your capital gains. Some brokers already provide you with these documents, but the IRS is speeding up the path to universal documentation. Receiving this document from a broker in the future will make tax season less stressful.

7. Can You Write Off Crypto Losses?

Writing off losses offers tax protection. Stock investors and real estate landlords frequently write off losses to minimize their tax bills. It’s natural for these investors to wonder if this benefit extends to crypto. Fortunately, investors can write off crypto losses. Losses can reduce your capital gains taxes by minimizing the total gain. 

Crypto and other assets come with limits on how much losses you can report. Investors cannot report more than $3,000 in total losses. If you have more than $3,000 in losses, the excess losses will carry into future years and offset future capital gains. This carryover process continues until you have fully taken advantage of your capital loss deductions.

Open a Crypto IRA to Save on Taxes

Crypto taxes can deplete your profits and tighten your finances. Unfortunately, some people use crypto as a form of payment without considering the tax implications. Investors have several ways to reduce their crypto taxes. Some people move to Puerto Rico for the tax benefits, but those laws can change at any time.

If you want to avoid capital gains legally without making drastic changes to your life, you can create an account on iTrustCapital. iTrustCapital is a crypto IRA account provider that lets you accumulate tax-free cryptocurrency gains. iTrustCapital only charges a 1% transaction fee and has no other costs. You can navigate to iTrustCapital’s website to learn more about their crypto IRA account and open an account today.

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