Started by Bitcoin, Mar 13, 2023, 11:02 am
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With all of the changes in cryptocurrency, one constant you can always count on is the IRS wanting its cut every April. We’ve partnered with ZenLedger to painlessly help with your reporting of your crypto transactions. You can capture information such as the cost basis of the crypto purchases and sales, gains / losses on crypto transactions etc. We gathered a few frequently asked tax questions that we hear from our customers, and some tips that we can share with you here. Please consult your tax advisor for any tax considerations for your business as well as for financial advice.
Right away, the bottom line is that you are required to pay taxes on crypto in the USA. Currently in 2023, the IRS considers cryptocurrency a property, so cryptocurrency is taxed the same as stocks, real estate or any other property.
Taxes should be paid for every taxable event – this is, whenever you sell, trade or relinquish crypto, convert one crypto to another and earn any sort of gain. You do not pay taxes on the entire transaction amount, only the profit (known as capital gains tax).
Your tax rate will depend on a combination of how long you’ve held your crypto assets and the value of your gains. Assets held for less than one year are taxed at a short-term gains rate. Assets held for longer than one year are taxed at a long-term gains rate. Read more about crypto tax rates to dive deeper.
The IRS considers any event in which you profited from a cryptocurrency transaction to be taxable. Buying crypto in itself is not a taxable event. Neither is holding crypto, even if your portfolio is significantly more valuable than previous periods (lucky you). It is the act of selling or converting to fiat or any other crypto currency and earning a profit from that disposal that signals the taxable event.
Suppose you acquired 1 Bitcoin for $10,000 and now wish to use it when the fair value is $50,000. Here’s how that cryptocurrency event would be taxed:
Read ZenLegder’s guide to crypto taxes for more advanced scenarios and details around taxable events. Things can get a bit more complicated when advanced crypto activities like margin trading, mining, hacks, lending, staking, airdrops and collecting rewards are involved.
The number one rule for properly reporting and filing your crypto taxes is to keep track of your transactions! This can be done manually, but it may open you up to human error and, let’s be real, is a pain to deal with. A much more efficient way of preparing your taxes is with specialized crypto tax software like ZenLedger.
The IRS instructs crypto users to report your gains and losses on Form 8949. Use this form to list details about your crypto transactions and calculate your liability, including:
Once you’ve calculated your gains/losses on Form 8949, include this information on form 1040 Schedule D. Both Form 8949 and Form 1040 Schedule D should be filed with your annual income tax forms.
Depending on which crypto services you use, including centralized exchanges like Coinbase or Kraken, you may receive additional forms including: 1099-B, 1099-MISC and 1099-K.
You could manually keep track of your transactions in a spreadsheet and then fill in each form, but this can be a tedious task. Instead, BitPay and ZenLedger make this an easy and automated process. BitPay users can sync wallet transactions directly from within the app to ZenLedger’s intuitive tax software. With just a few taps from the BitPay app, ZenLedger can automatically calculate fair market value, gains/loss, apply cost basis to the tranche of the crypto sold, and tax-loss harvesting from your transaction history. It can also calculate cost basis using various methods such as FIFO, LIFO, specific identification etc.
For realized gains and losses to be calculated accurately, it is important to have the underlying data from all the wallets and exchanges where you have crypto aggregated accurately. Any inter-wallet or interexchange transfers between your own accounts will be eliminated upon consolidation as such transfers do not trigger taxable events.
How to use BitPay + ZenLedger to prepare your crypto taxesMake sure you have the latest version of the BitPay Wallet or download the app here
Once you’ve created a ZenLedger account and connected your wallet, your transactions will appear within your ZenLedger dashboard. Now you are ready to use ZenLedger to prepare and file your crypto taxes.
As outlined by ZenLedger, there are multiple ways to reduce your crypto tax liability. Some of the most common ways include:
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