Not paying your crypto taxes to Uncle Sam can result in five years in prison and up to $25,000 in fines.
Thanks to the decentralized nature of cryptocurrencies, many people are still unaware of how to report their cryptocurrency taxes—or even that they’re liable for any.
If you are a cryptocurrency beginner, you must clearly understand how crypto taxes work and how to report your gains accurately. The IRS can tax you on crypto transactions, and they will differ between use cases.
To ensure that you accurately report your returns, you need to understand what types of taxes you’re triggering, how to calculate your profits, and how to represent token value compliantly.
Sounds complicated? It can be. However, the good news is once you wrap your head around how crypto taxes work, you can set up a system to ensure you stay compliant.
Keep reading to find out everything you need to know as a cryptocurrency beginner about taxes.
Are Cryptos Taxed?
First things first, let’s get one thing clear. Cryptocurrency gains and income are most definitely taxable.
Whether you start swapping cryptos using Paypal, trade on Coinbase, or simply buy a cup of coffee with Bitcoin—you may trigger taxable events.
The exact rate of taxation will depend on how the gain/income was realized and what tax bracket you are in. If you are in the lowest tax bracket, you may find that your tax rate on a return is 0%. However, this does not mean that you don’t have to report it.
Even if you do not have to pay tax on a crypto gain, you are still responsible for reporting it to the IRS.
How Cryptocurrency Taxes Work
So, all crypto gains or forms of income are taxable. But how are they taxed? Let’s take a look at some of the different types of taxation that crypto can fall under.
There are two main ways the IRS taxes cryptos. As a capital gain and as an income.
In the eyes of the government, cryptocurrencies are not currencies, despite their name. They’re classified as “property,” similar to real estate, shares, and other types of tradable assets. Therefore, the IRS levies capital gains tax against crypto earnings.
When you dispose of property (aka sell it), this can trigger a capital gain. For instance, say you bought a house in 2012 and sold it eight years later. In this time, the property’s value increased, and you made a $200,000 gain on the sale. This gain will attract capital gains tax.
The same system applies to cryptocurrencies.
Like with other fixed assets, there are two types of capital gains tax that apply to cryptos, short- and long-term capital gains tax.
You attract short term capital gains tax when you sell crypto (or another asset) within a year of buying. If you have held the asset for more than a year, gains on its sale are taxed as long-term capital gains.
Short-term capital gains tax is levied at the same rate as your income tax. The IRS taxes long-term capital gains on crypto in the following relation to your income bracket:
- 10-15% income bracket: 0%
- 25-35% income bracket: 15%
- 35%+ income bracket: 20%
As you can see, the long-term capital gains rate is lower than the short-term capital gains tax. This means if you engage in longer-term crypto investing, your tax liability could be less than for day trading.
In some cases, crypto you receive can also be classified as income and be taxed as such. This can happen in a couple of ways.
If you earn a salary that you receive in a cryptocurrency, this falls as taxable income. In addition to income tax, you will also need to pay health insurance and unemployment tax on this.
If you’re a miner, the mining rewards you receive are also classed as income.
Another instance where you should report crypto gains as income is when they come in the form of liquidity provider rewards. If you are a liquidy provider, you receive a share of the 0.3% fee that Uniswap charges for token exchange.
You can choose to report these earnings as either interest income or rental income. You are effectively “renting” or “borrowing” your capital to the network to facilitate liquidity.
Additionally, airdrops are also deemed as taxable income. You will need to report them as the dollar equivalent of the token value on the day you received them. This applies to all airdrops, including Uniswap tokens.
Understanding the Token Value of Uniswap Cryptos
Speaking of Uniswap tokens, are Uniswap trades taxable? Yes.
Any Uniswap tokens received through airdrops are classified as income.
Besides this, Uniswap users also receive UNI-V1 tokens for adding liquidity. In some cases, adding liquidity is not a taxable event. However, if you sold other cryptocurrencies to add liquidity, any gains on these sell orders would need to be reported.
What’s more, when you remove your share of the pool and burn your UNI-V1 tokens, this is also a taxable event, and you will need to report the profit or loss on your deposit.
How to Calculate the Value of Your Taxable Crypto Gains
Whether you receive crypto as income or as capital gains, you will need to do some calculations to determine what dollar amounts you must report to the IRS.
The IRS requires that you calculate the dollar value of any income or capital gains obtained at the date you receive them. They want to know what the crypto was worth at the time the taxable event happened.
Calculating Capital Gains
To calculate capital gains (or losses) on sell orders, you will need to subtract the base cost (the price you bought the tokens) from the selling price.
The difference is your capital gain.
For example, last year you bought 3 ETH. At the beginning of this year, you sold 1 ETH.
To worth out your capital gain, you will need to subtract what you paid for the 1 ETH (in dollar value at the time) from the dollar value you sold it for. In the case of ETH transactions, you will also want to subtract any gas fees incurred from your total profit on the trade.
If you receive crypto income, you need to report it at its dollar value on the day you received it.
You might also need to deduct any eligible expenses. This is also calculated as the dollar value on the day the expense happened.
For instance, say you are a miner. You’re allowed to deduct certain expenses, such as electricity and equipment costs. These expenses need to be recorded at their dollar value when they’re incurred. You must then subtract this dollar value from your mining income.
Set up a System to Track Your Gains Before You Start Trading
As you can see, accurately reporting your crypto profits and earnings can take some doing. To make sure that you know the dollar value profit or loss on each trade, you’ll need to track every buy, sell, and other transaction you make.
One of the easiest ways to get into the woods with crypto taxes is to start buying and selling before setting up a system to track your profits. Trying to work out the dollar values afterward will be a time-consuming business, and can also be inaccurate.
If you are a cryptocurrency beginner, one of the first things you must do is start a record-keeping system for your trades and profits. You can do this by using spreadsheets, accounting software, or an application that handles cryptocurrency taxes.
Also, take note that although some trading platforms do provide users with a 1099-k form, you should not rely on this as your sole record.
As a user, you will need to have made at least $20,000 gross sales during that tax year and conducted a minimum of 200 transactions to receive a 1099-K. Anything below this, and you won’t receive the form.
How to Report Your Gains
Once tax season rolls around, you will need to report your crypto-related capital gains and income using IRS Form 8949 and Schedule D.
To start, list all of your individual trades and capital gains/losses on Form 8949. Then you will need to record the totals on Schedule D.
If you have earned crypto income, you must report this on Schedule 1 if you’re employed or Schedule C and you are self-employed (e.g., a miner).
Streamline Your Trading
Even though there are more than 40 million crypto users globally, many people still do not understand know to report their cryptocurrency taxes correctly. Fortunately, now that you know the basics, you’ll be well on your way to tracking your trades like a seasoned (and tax-compliant) pro.
Want to know another way to keep your crypto taxes simple? Keep your trades in one easy-to-use dashboard, which is precisely what we provide here at Swapfolio.
With Swapfolio’s versatile dashboard, you can manage your trades with ease and take advantage of the hottest new projects on the Uniswap token list.
Ready to streamline your Uniswap investment portfolio? If so, all you have to do is log in to the Swapfolio trading app.
After adding your public Ethereum address, Swapfolio will display a list of all the Uniswap tokens and their token value in your wallet. From within the Swapfolio App, you can start trading with as little as one click.
If you want to find out more about the power of Swapofolio, take a look at our light paper.