Whether you are an active day trader or a passive holder, taxes are likely not the first thing that comes to mind when you think about your crypto portfolio. After all, most traders want to understand and invest in the potential of blockchain projects and new market opportunities, not file reports. Nevertheless, we have once again arrived at every accountant’s favorite season. As cryptocurrencies have continued to gain mainstream adoption, US tax laws have continued to evolve with the latest trends. Each year, the IRS becomes both better at detecting and stricter with enforcing . It has become increasingly important for all investors, traders, and even to understand the proper cryptocurrency tax filing procedures. non compliant crypto tax filings perpetual hodl’ers Property The first thing to understand is that cryptocurrencies are considered a under US tax law. This classification as property means that cryptocurrencies are subject to the same as other assets such as stocks and bonds. Just like other forms of property, crypto traders incur capital gains or capital losses property capital gains taxes when selling or trading assets. Realized Gains / Loses In an environment as volatile as digital assets, it is important to remember that returns are only truly earned when they have been . But what does this concept of “realized” mean? Realization often seems to escape many novice traders, as they see the “on screen” price of their asset change. The profits earned or losses incurred from price changes are only realized when the asset is: realized Sold- converted to fiat or spent Traded- converted to another asset Earned- received in exchange for providing a good or performing a service Though a trader’s portfolio may fluctuate 25% in just a few hours, the gains or losses are purely hypothetical (especially for tax purposes) until the digital asset has been sold for government-backed currency, traded to another asset, or earned / spent on a good or service. Taxable Event The IRS views the as a taxable event. For cryptocurrencies, include: realization of gains taxable events Trading crypto to fiat currency (for example: converting BTC to US dollar, Euro, or Yen) Trading one cryptocurrency for another cryptocurrency (for example: ETH to BTC) Spending crypto to purchase goods or services (for example: purchasing a Tesla, pizza or NFT) Earning crypto as income (for example: from a job, mining, staking, airdrop, or interest from lending activities) Non-Taxable Events Many purely long-term investors may be unclear about the proper reporting of their crypto holdings too. As non-speculative investors, they may have purely thought about a long-term exposure to an emerging technology, not the regulatory oversight this brings. There are also events that every crypto trader will experience that will not trigger realized gains that result in a taxable event. These include: Buying and holding crypto Transferring crypto from one wallet to another These are not taxable events because . The cryptocurrency that the trader initially bought or earned (and therefore already paid the tax on that earning event) has stayed the same, without any sort of conversion or taxable event taking place. no realized gain takes place Capital Gains Tax Contributing Factors For those that have realized their gains, there are two main factors influencing their tax contributions. These are the individual’s income bracket and the timing of their investment. Income Bracket Annual income is used to distinguish individuals' tax rates. The 2021 capital gains tax rate for individuals is: 0% for those earning up to $40,000 per year 15% for those earning up to $441,450 20% for those earning more than that This helpful can guide you through the math. IRS worksheet Short Term vs. Long Term The IRS considers any trade exercised within 12 months to be short-term, and taxes these at a higher rate than long-term capital gains. If a trader has owned a digital asset for more than a year, he or she will pay a long-term capital gains tax rate on the realized gains/losses. significantly lower Reporting Accurate and detailed reporting is the best way to ensure a compliant tax filing. After ensuring that traders have captured all of their investment decisions, these details must be reported in the proper IRS documentation. Crypto capital gains / losses are recorded on the , which is used to report the sale or disposal of capital assets, cryptocurrencies included. On the form, traders list: IRS Form 8949 All cryptocurrency trades, sales, and disposals The date they acquired the asset The date sold or traded the asset The proceeds ( ) Fair Market Value The cost basis The gains or losses for the trade DeFi Taxes With lending platforms that provide liquidity in a way gaining popularity in the past year, it is important to understand the tax implications of these new tools. decentralized DeFi investment earnings are considered , and are therefore must also be reported. Liquidity Pool Tokens must be reported as . This is because liquidity pools operate on a trade/token swap based model. However, centralized cryptocurrency lending platforms such as , would be taxed as (at a lower rate). income capital gains income BlockFi ordinary income That is because these platforms return interest in the form of the digital asset that was deposited, instead of a token-based system. Understanding the tax implications of these emerging financial instruments will be important for all crypto traders to understand during this year’s tax filing. The same rules apply to yield farming and liquidity mining, but . On DeFi platforms that reward users in governance tokens, such as , tokens earned are . not governance tokens Compound taxed as income at the time when they are earned This is based on when a participant receives the governance and incentive tokens similar to COMP, and is based on the market value of the token . Selling of these tokens triggers a taxable event where the capital gain or loss is realized, and therefore must also be reported accordingly. when received NFT Taxes Non-Fungible Tokens have exploded in popularity in the past year. Many new investors may be filling the purchase of an NFT for the first time in 2021. But in the eyes of the IRS, they are also a form of property like all other digital assets, and are therefore reported in the same way. Conclusion Calculating capital gains and losses from crypto trading activity . Since most traders utilize more than 3 exchanges, this process can be daunting for traders to manage across all of their trading platforms. Digital Asset traders need to have accurate records that keep track of their cost basis, fair market value, and USD gain or loss every time they trade, sell or spend their digital assets. Managing this entire process may take diligence and time that traders simply do not have. becomes exponentially more complex with each transaction At TradingBull, we understand that both seasoned traders and new investors did not become involved in the cryptocurrency space because of their interest in taxes. They want to understand the potential of an emerging technology and capture the market opportunities that it can bring to the digital age. With all of a trader’s exchanges, wallets, and portfolio management tools consolidated within a single interface, the tax module will allow for a pain-free and accurate way of quickly filing crypto taxes. TradingBull Filing accurate tax reports will no longer be an intimidating and painful process on the TradingBull platform. TradingBull gives digital asset traders the resources and capabilities they need to take back control of their portfolio. Check out our , join our , ask us about our platform, stay tuned about our upcoming launch. website Telegram This is not tax advice and should not be considered as tax advisory. NOTE: Also published on: https://www.publish0x.com/tradingbull-articles/tradingbull-s-complete-guide-to-crypto-tax-season-xxweqew

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An Introductory Guide to the Crypto Tax Season

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