Staying Tax Compliant with Crypto Assets: Everything You Need to Know

Read on to learn more about everything that you need to know about taxes and cryptocurrency.

Cryptocurrency Taxation - What to Know

Now, if this is your first time trading cryptocurrency, you might want to opt for Crypto Tax classes so you can fully understand your taxable digital assets, such as NFTs and Ethereum. Platforms like Intuit Academy offer learning resources that explain how digital assets are taxed and how to stay compliant with IRS rules. With that said, you should know that trading or selling cryptocurrency for profit makes you eligible for capital gains tax. The amount that you owe in terms of tax depends on the potential duration of your cryptocurrency holding period, as well as your income. 

Of course, you should know some general rules, such as the rule of holding cryptocurrency for less than a year or one year, in which case the capital gains tax will be your regular rate of income. On the other hand, if you hold your cryptocurrency for more than a year, you essentially qualify for long-term and lower capital gains tax.

When is Crypto Treated As Normal Income

If you own cryptocurrency, you should know that if you earn digital currency through staking, mining, or in the form of payment for your specific services, then it will be treated as normal income. What this means is that you will be taxed on the respective market value of your cryptocurrency for the specific time that you receive it.

With that set, if you are self-employed, your cryptocurrency income can be categorized as self-employment tax, which will then contribute to your Medicare and Social Security.

Calculation of Crypto Taxes

The process for calculating and reporting cryptocurrency taxes is essentially similar to calculating and reporting traditional investments. However, you can expect a few core differences. For instance, you can determine your taxes based on the original value of your investment in cryptocurrency. Typically, this cost includes the buying price of cryptocurrency, along with any commissions or fees that you paid.

When it comes to calculating taxes for your cryptocurrency, we advise you to maintain accurate records of all your transactions related to cryptocurrency, including records for fees, sessions, dates, and other relevant information.

Best Strategies for Minimizing Your Cryptocurrency Tax Liabilities

Now that you have gotten a better idea about taxation and cryptocurrency, let us explore some of the best strategies that can help you minimize your tax liabilities regarding cryptocurrency. With that said, you should know that you can actually hold your cryptocurrency for more than a year. And by doing so, you can actually decrease your tax rates, as you will qualify for long-term treatment of capital gains.

Similarly, another great strategy to minimize your potential tax liability comes down to gifting or donating cryptocurrency. What this means is that if you donate cryptocurrency to a trust or charity, you will actually minimize its market value from your income. If you receive currency as a self-employed individual, you are actually eligible for some extra deductions.