Crypto Tax Planning in the USA

The USA tax season is approaching quickly. Here's what you should plan for your crypto taxes for the IRS.

To avoid an unwanted IRS audit, it's important to get your crypto taxes in order. Follow these steps:

• Mark the key IRS crypto tax dates on your calendar.
• Review and optimize your crypto portfolio before the end of the financial year.
• Understand how the IRS taxes crypto assets.
• Gather all necessary information for filing your crypto taxes.
• Calculate your crypto taxes accurately.
• Report your crypto taxes to the IRS on time.

If you miss the IRS filing deadline of April 15th, you could face hefty penalties, including up to 25% of your tax bill, a maximum of 3 years in prison, and a fine of $250,000.

Important Dates for Crypto Taxes

In the US, the financial year starts on January 1st and ends on December 31st. You must report your crypto transactions for the previous financial year by April 15th of the following year. Typically, this deadline falls on April 15th, but it may be extended due to national holidays.

Take Action Before the End of the Financial Year to Reduce Your Tax Bill

To lower your tax bill and optimize your tax situation, it's crucial to act before the end of the financial year. Any transactions you make after this point won’t affect your upcoming tax bill but will impact the following year's taxes instead.

Here are some tips to prepare your crypto taxes before the end of the financial year:

• Hold onto your assets for at least a year to qualify for a lower long-term Capital Gains Tax rate.
• Choose the most suitable cost basis method for your assets.
• Decide whether to take the standard tax deduction or itemize your deductions.
• Offset capital gains by up to $3,000 per year with capital losses.
• Carry over capital losses to future tax years to offset future gains.
• Identify unrealized losses to offset against gains.
• Gift up to $17,000 worth of crypto per person without incurring taxes.
• Donate crypto to registered charities to deduct it from your taxes.
• Consider investing in an IRA or opportunity zone fund.
• Explore DeFi investments that increase the value of your crypto assets instead of providing interest income. This way, you'll pay the lower Capital Gains Tax rate instead of Income Tax.
• Have unrealized losses? Consider harvesting them, including any worthless NFTs, to offset against your net capital gain. In the US, the wash-sale rule only applies to securities, not crypto, allowing investors to sell crypto at a loss and repurchase them immediately. This loophole lets them create artificial losses to lower their tax bill, known as tax loss harvesting.

Read this detailed guide on how to avoid crypto taxes in the USA to know more..

How is Crypto Taxed in USA?

The IRS doesn't view cryptocurrency as regular money. Instead, they see it as something you own, like stocks or property you rent out. This means when you sell your crypto and make money, you might have to pay one of two kinds of taxes: Capital Gains Tax or Income Tax.

Capital Gains Tax is what you pay when you make a profit by selling/Disposing the asset.

Income Tax is what you pay on the money you earn, like when you get cryptocurrency from: 

• Staking
• Liquidity mining 
• Airdrops

To learn more about how cryptocurrency gets taxed in the US, you can check out our USA Crypto Tax Guide. 

Why Keeping Detailed Records of Your Crypto Transactions is Crucial

The IRS is interested in knowing about any time you've bought or sold cryptocurrency that could be subject to taxes. Whether you made money or lost money doesn't matter to them.

That's why it's super important for people who invest in crypto to keep really detailed records of all their transactions. Ideally, you should keep track of everything since you started trading.

At the very least, you should have this info for each transaction:

• The Date you have acquired the crypto.
• What kind of crypto it was.
• How much it cost you in dollars when you acquired it.
• When you got rid of the crypto.
• How much the cryptocurrency was worth in dollars when you got rid of it.
• How much did you gain or lose after disposing of the asset.
• Any receipts, records or other proof of what happened.

Keeping track of all this can be tough, especially if you do a lot of transactions. But there's crypto tax software out there that can help with crypto taxes.

Where can I get my Crypto Tax Info?

There are two ways to get the information you need for your IRS tax forms.

First, you can gather files of your transactions from all the crypto exchanges and wallets you use. These files might be statements, transaction histories, or reports. Then, you can make a single spreadsheet with all your crypto transactions. This can be a lot of work, especially if you use many exchanges and have lots of transactions. Sometimes, exchanges don't give you all the data you need, so you may have to put together files from one exchange to get a full picture of your transactions.

The second way is to use special crypto tax software like Kryptos. Kryptos works with all the major crypto exchanges, wallets, and blockchains. It gives you step-by-step instructions on how to connect each one, including popular ones like Binance US, Coinbase and Kraken, as well as others like Metamask and Trust Wallet. Here's how easy it is:

1. Sign up for a free Kryptos account.

2. Choose your country (like the United States), your currency (like USD), and your method for calculating costs (like FIFO, LIFO, or HIFO).

3. Connect Kryptos to all your crypto wallets and exchanges using API or by importing CSV files. Kryptos integrates with over 2000+ different exchanges, wallets, and blockchains.

4. Let Kryptos do the Math.

5. Your data is gathered, and a complete tax report is generated, including the specific IRS tax forms you need.

6. To download your crypto tax report, you can upgrade to a paid plan starting at $39 a year.

7. You can file your tax return yourself using a tax app, or give your crypto tax report to your accountant.

How to Tell the IRS About Your Crypto?

When it comes to reporting your crypto to the IRS, it's important to do it right. Here's a simple breakdown of what you need to know:

You'll need to report all your crypto activity from January 1st to December 31st of the previous year by April 15th of the following year.

To report your crypto activity, you'll use your Individual Income Tax Return (Form 1040). There are a few other forms you might need, but here's a quick overview:

• For crypto capital gains and losses, you'll fill out Form 8949. This form details your taxable transactions, and you'll attach it to Schedule D (Form 1040), which shows your net capital gain or loss.

• If you earned income from activities like airdrops, forks, or hobby mining, you'll use Schedule 1 (Form 1040). For income from staking rewards, liquidity pools, or other interest, you'll need Schedule B (Form 1040).

• If you're self-employed or running a crypto business, you'll use Schedule C (Form 1040) to report all your crypto income.

FAQs

1. What are the important dates to remember for filing crypto taxes in the USA?

It's crucial to mark your calendar with key dates to ensure you meet IRS requirements. In the USA, you need to report your crypto transactions from the previous financial year by April 15th. This deadline typically falls on April 15th but may vary due to national holidays.

2. Why is it essential to take action before the end of the financial year for crypto tax planning?

Acting before the financial year ends can significantly impact your tax bill. Any transactions made after this period won't affect the upcoming year's taxes but will influence the following year's liabilities. Taking steps like holding onto assets for at least a year or exploring suitable deduction options can optimize your tax situation.

3. How does the IRS classify and tax cryptocurrency transactions?

The IRS views cryptocurrency as property rather than regular money. This means when you sell crypto and make a profit, you might be subject to Capital Gains Tax or Income Tax, depending on the nature of the transaction. Understanding these tax implications is crucial for accurate reporting to the IRS.

4. Why is keeping detailed records of crypto transactions important for tax purposes?

Detailed record-keeping of crypto transactions is vital to comply with IRS regulations. Whether you made profits or incurred losses, the IRS requires thorough documentation. Keeping track of transaction dates, types of crypto, costs, disposal details, and gains/losses is essential to avoid potential penalties.

5. Where can I find assistance in organizing and reporting my crypto tax information?

You can gather transaction data from your crypto exchanges and wallets, but this process can be labor-intensive. Alternatively, specialized crypto tax software like Kryptos simplifies the task by integrating with major exchanges and providing step-by-step instructions for data collection and tax reporting.

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All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!