Cryptocurrency has taken the world by storm. Just a few short years ago, digital tokens were almost exclusively thought of as a horrible investment, but today, they are a hot topic on Wall Street.
With so much increased demand for crypto, we have seen a proliferation of new cryptocurrency exchanges, hot and cold wallets, and mining services. This has led to many new and experienced investors coming into the world of crypto.
But one there's one thing that continues to be unclear: how do taxes work with cryptocurrency? In this article, we are going to review cryptocurrency taxes and provide a brief review on a stellar resource, CryptoTrader.tax, which you can use to automate your taxes relating to crypto.
Cryptocurrency, or crypto, is a type of currency. Like the US dollar or Chinese Yuan, crypto is a currency that can be used to buy goods and services. However, there is one key difference: crypto is not backed or regulated by a central bank. Cryptocurrency is made possible through blockchain technology, which utilizes cryptography to secure the network.
The first crypto was Bitcoin, which was launched in 2009. Today, there are thousands of different cryptos to choose from.
Cryptocurrency is managed across many computers in an online ledger. This appeals to many as it makes it nearly impossible to counterfeit.
Some think of crypto like an arcade token. You can exchange other money for coins or tokens and use them for a variety of games. Today, companies are starting to accept various forms of cryptocurrency as payment for their goods and services.
The value of a crypto moves up and down due to spectator beliefs and scarcity of the currency. Unlike a company that produces a product or offers a service, there is no inherent value of a cryptocurrency, which adheres to the Greater Fool Theory.
The Greater Fool Theory is an economic principle that states money can be made when buying overpriced assets. This is possible as there is typically someone else who would be willing to pay more for that same asset.
While we watch cryptocurrency develop and reach new highs, someone else is watching too: The IRS. Trading various digital coins can be lucrative, but it is important to understand the tax implications that lurk behind every trade.
In 2014, the IRS decided that cryptocurrency would be treated as a capital asset, like stocks and bonds.
A capital asset is taxed when it is sold for a profit. This is a bit easier with stocks as they aren't typically used for transactions. With crypto, you can use it to purchase a good or service.
When you purchase goods or services with cryptocurrency, and the amount of crypto you spend has gained in value over what you paid for it, your spending incurs capital gains taxes. Likewise, if you decide to sell your crypto to swap it for another or withdraw the funds, you will incur capital gains taxes.
Imagine you purchase Ethereum (ETH) for $50, and it soon rises to $100. If you spend that $100 worth of ETH on some good or service, you will be responsible to pay taxes on the $50 gain. Whether you sell a crypto for a profit or use it to buy a good or service, the IRS still wants its share.
The amount of taxes you will pay on crypto gains is determined by your annual income and the length of time you held the asset. Capital assets that are held for under a year are taxed higher than those held for longer than a year. This is what is called short term and long term capital gains.
Taxes with crypto can be confusing. Tracking all transactions, incentives from staking, gifts, transfers, and trades can be a lot. Luckily, there is a solution.
In 2017, Coin Ledger was founded in Kansas City, Missouri. Soon after, they launched CrytpoTrader.tax, which is an online platform that aims to simplify taxes relating to cryptocurrency.
CryptoTrader.tax is tax software built to save you time and maximize your refund. The platform features an ability to easily import all of your transaction history from an exchange and then automatically creates all the reports you will need come tax season.
"Since inception, CryptoTrader.Tax has become the go-to resource for all things crypto taxes. Tens of thousands of crypto users all over the world rely on the platform to handle their tax reporting, billions of dollars of cryptocurrency transactions are reported on every year, and partnerships with industry leaders such as Intuit TurboTax have brought seamless crypto tax reporting to the mainstream."
They have amassed over 100,000 clients since launch and have received excellent reviews. Taxes incurred from cryptocurrency don't have to be a nuisance with CryptoTrader.tax.
CryptoTrader.tax makes taxes with cryptocurrencies easy. They have 5 simple steps that you can follow:
Using the service and receiving a preview of the reports is completely free. It is worth taking the time to estimate the taxes you will need to set aside. If you decide to move forward for CryptoTrader.tax, they have 4 different pricing tiers.
View full CryptoTrader.tax pricing table.
Each of the plans differs only by the number of trades you have executed. They all come with a 14 day money back guarantee and a free preview. Additionally, they all feature the same reports and compatibility with exchanges. As you import your history into the software, it will keep a tally of the trades you have made. This way, you can quickly see how much you will need to spend before ever moving forward.
Cryptocurrency has certainly become more popular in the last few years. With the increased demand, there have been new platforms for trading and storage. Exchanges like Coinbase and BlockFi have attracted millions of users.
Every single transaction with cryptocurrency carries tax implications with it. For some, the taxes incurred from trading crypto can be highly confusing. Reporting every transaction can become a nightmare! Understanding the taxes associated with cryptocurrency is highly important in order to minimize the amount owed or to simply avoid an audit from the IRS.
Services, like the one offered by CryptoTrader.tax, make taxes with crypto so much easier. With a simple ability to import all transaction history, users can quickly watch their reports made automatically. When you are ready to file your taxes, these reports could certainly make your life easier. To learn more, be sure to visit their help page or browse their website to get started.