In 2014, the IRS declared cryptocurrency as a taxable property, requiring crypto traders and holders to report digital assets just as any other investment. However, since then the IRS has seen recording-breaking unclaimed taxes in the form of cryptos.
If you hold cryptocurrency or have made a profit in 2020 from trading or selling coins then you need to be sure to file your crypto taxes to save yourself from an audit.
Luckily, there are many ways to learn how to file your crypto taxes. Read on to get to know the basics about filing taxes for digital assets and the four best cryptocurrency taxes software to get your filing done right.
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Do You Have to Pay Taxes on Cryptocurrency?
Your first step in filing cryptocurrency taxes is determining if you need to pay anything. This simple answer to this question is yes, most likely. But, we live in a complex world with complex answers, so let’s go over this in more detail.
The real way to get an idea of whether you need to pay taxes on crypto and eventually how much you will pay depends on four factors:
- Where you live and file
- What type of crypto activities you conduct
- How long you held your crypto
- How much crypto you used/gained as profit
We will go over the first and second points then explain the last two points when discussing how much crypto taxes you may need to pay.
Paying Cryptocurrency Taxes by Country
Every country has their own laws regarding cryptocurrency tax. Some countries do not even recognize cryptocurrency as a property and therefore doesn’t tax it.
For example, Belarus legalized crypto and made it tax exempt until 2023 in hopes to boost the economy. Other countries like Germany only tax crypto asset gains if they were held for less than a year. And of course, there are countries like the U.S. that diligently taxes any crypto—the amount depending on income as we will see below.
Cryptocurrency laws continually change. For instance, Russia is in the process of making Bitcoin a protected property—prone to taxation.
Therefore, it is best to research your own country’s laws before embarking on your crypto tax journey.
Types of Taxable and Non-taxable Crypto Activities
When trying to determine do you pay taxes on cryptocurrency, most countries have a set of rules that depend on how you use your crypto. However, there are taxable activities and non-taxable activities that fit most national standards.
- Selling Bitcoin and other crypto for fiat (government currencies, ie., USD and EUR)
- Paying for items and services using crypto
- Getting paid in crypto (either as an income, mining rewards, or interest)
- Crypto-to-crypto trading
The value of these activities is most likely subject to taxation since the crypto is being used as a transferable asset.
- Donating crypto to a non-profit (same as with any other currency)
- Buying crypto with fiat (the crypto hasn’t been used as a profit yet)
- Giving crypto as a gift (same with any other currency)
- Moving crypto from one of your digital wallets to another (including cryptocurrency exchange wallets)
These crypto activities can be left out of your total paid taxes since they are tax exempt, however they should still be reported on your taxes.
How Much Taxes do You Have to Pay?
Now that you know if you have to pay taxes on your cryptocurrency we will discuss how much you will actually have to pay.
Taking the two factors into consideration (your country and crypto activities) we will move to how you can calculate your cryptocurrency taxes based on your capital gains.
Capital Gains in Cryptocurrency
What does capital gains in cryptocurrency mean? The profit received from your crypto investments are your gain.
How much tax you pay on capital gain is based on the last two factors: how long you hold your cryptocurrency before selling or using it and how much profit (capital gain) you received.
For example, if you bought $1,500 worth of Bitcoin then sold the same amount of Bitcoin for $2,000 then your capital gain would be $500. The $500 would be the taxable amount.
The percent of tax varies based on how long you “held” your crypto. So, that $500 would be taxed differently depending on how quickly you took your profit.
Let’s go over the holding period classifications that determine the percent of owed taxes.
These are cryptocurrencies that you hold for less than a year. Most countries tax a higher percentage if you acquired any capital gains on a cryptocurrency in under a year.
Other factors—like in the U.S.— that affect your tax percentage is your income and filing status (single, married, or head of household.)
Capital gains acquired after a year of holding are considered long-term assets. These tax percentages will be significantly lower. In some cases, if your income is below a threshold then the tax percentage could be as low as 0.
How to Pay Taxes on Cryptocurrency?
Let’s use the U.S. as an example since its government is quite clear about their crypto tax laws. The IRS issued a new Form 1040 for 2020 to leave no doubt in the filer’s mind that they need to claim their crypto capital gains.
The form has a section that asks if you sold, bought, traded, exchanged, or in anyway acquired virtual currency in 2020.
Other countries may not be so upfront about their cryptocurrency tax filing. In either case, you should include your capital gains and tax exempt itemizations in your filing.
This can be a complicated process since cryptocurrencies are unstable and provide capital gains throughout the year.
You should get all the help you can. That is why in the next section we will show you the best cryptocurrency taxes software to make crypto tax filing as easy as it could be.
How to Choose a Cryptocurrency Taxes Software
The last thing you need while filing complicated taxes is to learn a complicated cryptocurrency tax software program.
You also don’t want to have to use too many programs or purchase one that you don’t need.
Be sure you make a smart move and pick the best crypto tax tools available.
Here are a few things to consider before choosing:
- Fees and prices for using or buying the software
- Filing capabilities (does the program actually file your taxes for you)
- Crypto exchange and wallet integrations
- Supported coins (which cryptos does it calculate)
- Fluidity with other tax and accounting programs
- Global accessibility or country-specific
You also want to research the company’s background and reliability since you will be entering personal information into their database.
Cryptocurrency Tax Software Reviewed
Now that you know the taxation policy in your country, how to decide what crypto activities are taxable, and how to calculate your capital gains, let’s take look at some of the best crypto tax software programs available.
Using the Best Cryptocurrency Taxes Software Before Filing
Now that you know if you need to pay taxes on your crypto and how to calculate them it is time to start filing. Using these best cryptocurrency taxes software programs can help you track your crypto gains and losses throughout the year. Then you will be ready to file your taxes by the start of the new year.
Leave a comment below telling us about any tips and tricks you have that make filing crypto easier.