According to a survey conducted in 2020 by the University of Chicago, nearly 13% of Americans have invested in or traded digital currencies. With an increasing number of Americans diversifying their investments to include digital assets, the importance of understanding the cryptocurrency taxation applicable to them can’t be overemphasized.
This article delves into the tricky world of cryptocurrency taxation and provides you with information that helps you to avoid potential tax pitfalls while helping you to secure your financial future by providing a credible guide on tax structures, brackets, and penalties for defaulting.
It also gives a list of the best, tested, and proven tax tools for US-based cryptocurrency investors to accurately calculate their taxes.
Cryptocurrency Taxation in the U.S.A
The US government considers cryptos as property and are thus taxed accordingly. Hence, gains from trading digital assets or selling them are considered capital gains for tax purposes.
In the United States, the Internal Revenue Service (IRS) treats cryptocurrencies as property for tax purposes. This means that the general tax principles applicable to property transactions also apply to cryptocurrency transactions.
Tax Brackets and Structures
The progressive tax system employed by the US covers capital gains tax. Short-term gains from assets held for up to a year are liable to a federal income tax rate between 10% and 37%. Long-term gains from assets held for over a year attract tax rates ranging from 0% to 20%.
Federal and State Taxes
Crypto investors should be conversant with state taxes they may be subjected to as well. Although federal tax laws apply to crypto investors and traders nationwide, there are specific state-specific tax laws as well. Some states apply the same capital gains tax rates as the federal government while others charge distinct tax rates.
The Internal Revenue Service (IRS) treats cryptocurrencies as property rather than currency. This means that general tax principles applicable to property transactions, such as buying and selling stocks or real estate, also apply to cryptocurrency transactions.
Tax Reporting and Deadlines
US taxpayers must include virtual currency transactions on their annual tax return latest by April 15 of the following year. To be on the safe side, keep an up-to-date and comprehensive record of all your crypto transactions including the dollar values of the transactions, transaction date, and transaction purpose.
Taxpayers can also request an extension until October 15th by filing Form 4868, but it's important to note that this extension only applies to the filing deadline, not the payment of any taxes owed.
Penalties for Non-Compliance
Non-compliance with the crypto taxation law attracts stiff penalties. Underreporting or non-reporting of income from cryptocurrency can attract penalties, fines, and in extreme cases, criminal charges which may depend on the default degree.
When reporting all crypto transactions, be accurate and transparent to avoid these stiff penalties.
Common penalties include monetary fines, interest charges on unpaid taxes, and additional fees. Failure to file a tax return or pay taxes on time can result in penalties and interest charges.
Popular Crypto Exchanges in the United States of America
US investors patronize scores of crypto exchanges. Some of the most popular ones among investors are:
Binance.US: The most popular cryptocurrency exchange in the world is Binance.US, which attracts traders of all hues with its wide selection of crypto assets and meager transaction costs. With the new Binance app 2.0, traders based in the US can buy, sell, and trade over 150 cryptocurrencies on Binance.US.
Crypto.com: Crypto.com offers over 250 cryptocurrencies and 20 fiat currencies. The online trading platform provides an excellent marketplace for trading cryptocurrencies, supporting margin trading, derivatives trading, and DeFi wallet.
Coinbase: For buying and selling more than 170 cryptocurrencies, Coinbase provides one of the simplest platforms. It provides cutting-edge trading tools and features such as limit orders, charting tools, and a live order book.
KuCoin: Due to its sophisticated features, an extensive selection of crypto coins, and reduced fees, experienced crypto traders favor using KuCoin. The platform provides basic trading choices, peer-to-peer (P2P), futures, margin, and spot trading.
These cryptocurrency exchanges provide transaction data that may come in handy for tax calculation purposes.
Cryptocurrency Tax Tools for US Investors
Tracking and calculating crypto taxes may be challenging without the right tools. Here are some crypto tax software solutions for importing transaction data from multiple wallets and exchanges to calculate crypto losses, gain, and generate US tax laws-compliant tax reports:
Koinly: Koinly is, without a doubt, the cryptocurrency tax software with the most features. It offers reliable reports and can assist you in portfolio management to prevent overpaying for taxes. Koinly links with well-known exchanges and wallets automatically, allowing you to track your transactions conveniently. Once the data has been imported, you may use it to quickly and easily reconcile it from your report and exchanges.
CoinLedger: With the help of CoinLedger, you can calculate your Bitcoin taxes and other crypto taxes for the IRS. It will provide you with all the necessary paperwork, making it simple to complete the IRS 8949 form, short- and long-term sales reports, cryptocurrency revenue reports, foreign gain/loss reports, and many more forms.
CoinTracker: CoinTracker is a simple crypto tax program that allows you to track your cryptocurrency portfolio, investment profitability, and taxes by adding your first wallet or exchange. It supports over 8000 crypto assets and 300 exchanges, and you can send your crypto tax records to TurboTax or TaxAct.
TokenTax: TokenTax can relieve you of a sizable number of cryptocurrency tax reports, such as IRS Form 8949, cryptocurrency income tax filing, and foreign gain/loss reporting, and it can also produce a cryptocurrency audit trail. TokenTax separates itself from its competitors, though, since in addition to its software, they also provide excellent crypto tax services.
With crypto tax-calculating tools such as Koinly, CoinTracker, and the rest, you can confidently and effortlessly calculate and file accurate income gains from your crypto transactions without flouting related laws and regulations.