How To Pay Taxes On Cryptocurrencies – Everything You Need To Know

Cryptocurrencies have been rising in popularity for the past decade, with more and more people joining this future-tech movement each day. But this rise in popularity has dealt a blow to one of the biggest beauties of cryptocurrencies, which is decentralization and no control from governments.

As billions of dollars circulate in the market and a lot of people started to make very good money from crypto, governments jumped on the bandwagon to regulate this space and impose taxes on some crypto activities. But since crypto is still a vastly new concept and a lot of governments don’t know how to approach this subject, there is no one clear taxation guideline that most governments follow, and each country has its own rules and regulations, with some countries still not regulating or taxing people for crypto.

In this guide, we will be taking a look at how taxation works in the United States, as this is the crypto taxation scheme that a lot of governments look to when deciding how to implement new laws. So this is the closest guideline there is when it comes to taxing crypto.

Which crypto activities are taxable and which are not

There are many different activities that surround dealing with cryptocurrencies, and some of these activities fall under taxation laws, while others don’t. Knowing this is very important because if you miss something and the government spots it, you will get fined and in the worst-case scenario, you might even go to prison.

Non-Taxable Activities

If you go to a crypto exchange and buy cryptocurrencies using fiat money, you will not need to pay any taxes on it. What this means is that, whenever you buy cryptocurrencies, as long as these tokens remain in your wallet and are not exchanged, they are not subject to taxes. So you can buy however much you want and don’t worry about taxes as long as you don’t touch them, even if 10 years pass.

We also need to mention a little sibling of cryptocurrencies, namely NFTs. Since NFTs are digital assets, the rules about these assets are a bit complicated. If you are someone that creates NFTs as a job and not a hobby, expenses that go into minting these NFTs can be written off as business expenses and are not subject to any taxes.

Taxable Crypto Activities

We mentioned that as long as you hold your purchased cryptocurrencies in your wallet you don’t have to pay any taxes. But once these tokens leave your wallet and are used for something, this is when taxes are applied. So when you buy different cryptos using the crypto you own, essentially when you trade with cryptocurrencies, taxes are being applied to it. Also, if you use these cryptocurrencies to purchase anything or give them any use, you will need to pay taxes based on these transactions.

When it comes to NFTs, if you are creating NFTs as a hobby, whenever you mint new NFTs, you might need to pay taxes on the gas fees you paid. Other than that, NFTs are looked at the same way as paintings, meaning they are subject to capital gains taxes when you buy and sell them.

How are these taxes calculated?

Cryptocurrency taxes are calculated based on capital gains and losses. So whenever you buy a certain crypto and then sell it later, the difference in price is what you have made or lost, and have to pay taxes on.

If you are confused as to what this means, let’s take a look at an example. Say you bought $500 worth of Bitcoin and kept it. After this, prices went up and your Bitcoin is now worth $1000. Now you want to sell it to make a profit. Once you do so, it means you have traded with Bitcoin and made a $500 profit and will need to pay taxes on this profit. It is also important to take into consideration how long you have kept this Bitcoin since there are long-term and short-term capital gains and losses. If you have kept this Bitcoin for over 1 year, you will need to pay long-term capital gains taxes, and if you traded with it within 1 year, you will need to pay short-term capital gains taxes.

In the case of NFTs, things work pretty much the same. If you bought an NFT for 5 Ethereum, which at that time was worth $10,000, and then sold it for 7 Ethereum, which was worth $20,000, it means that you have made a $10,000 profit and have to pay taxes on that.

How To File Crypto Taxes

The first thing you need to know is the fair price value of your cryptocurrencies. Whenever you receive cryptocurrency, no matter how much you received or through which means you got it, you will need to look at how much this crypto is worth in that given moment when converted into USD, and this is our fair price value.

Once we know this fair price value, we need to use it as a baseline when calculating gains and losses. If you sold it for profit, subtract the fair value from the selling price and you will have the capital profit. If you sold it at a loss, subtract the selling price from the fair value and you have a capital loss amount.

In the end, you will need to fill a Form 8949 and report your crypto activities. When filing this form, you would need to write the name of the cryptocurrency, the time you acquired it, and the time it left your possession. You will also need to write the fair price value, the value you sold it at, and the amount of profit or losses that have been made.

Because of this, it is important to keep track of every crypto activity and write down all of the necessary information when trading or dealing with cryptocurrencies. If you are using just one exchange or platform, this might be easy, but if you move your assets across different platforms, things can get a bit complicated, so it is important to always have some sort of system in place for bookkeeping.

If you think that you can lie on this report, we would suggest thinking twice. If you are a US citizen, the IRS will soon be receiving your whole trading activity information and reports from the brokers you are using. Even if you are not a US citizen, and your country has crypto taxes, we would suggest that you pay them in full and don’t lie, as there is always a possibility of you getting caught and you might end up spending time in prison. Remember that all crypto transactions are locked into the public ledger, so the blockchain could serve as proof of your activities.

FAQs on How To Pay Taxes On Crypto

Do I have to report crypto on taxes?

It depends on where you live. Since cryptocurrencies are relatively new assets and many governments don’t know how to approach them, the laws and regulations around them differ from country to country. For example, in the US there are straight and simple capital gains taxes on crypto, while some countries don’t have any taxes on them. It would be best to contact the appropriate government organization to receive this information.

When do I pay taxes on my crypto?

It depends on the laws and regulations of your country. But in general, cryptocurrencies are not taxed until you use them. What this means is that whenever you buy crypto with fiat currency and keep it in your wallet and don’t trade it or use it in any way, you will not be taxed. You will need to pay taxes on them only when you trade them and they leave your possession.