Businesses are increasingly adopting cryptocurrencies for transactions, investments, and asset diversification.
But how is crypto taxed? Despite being a currency, the government taxes it according to short- and long-term capital gains, just like any other asset.
In this article, we’ll walk you through the fundamentals of crypto tax rates, filing with the IRS, and how to minimize your cryptocurrency tax liability.
Table of Contents
Doing Business Overseas?
Crypto Tax Rate
As a rule, if your business receives crypto as payment for a service, it’s taxed exactly the same as if you had been paid in USD. When you receive the payment, the fair market rate of the currency is known as its “cost basis,” and that’s the value you’ll use when reporting taxes.
When you sell your crypto, you’re also liable for capital gains depending on how much the price has changed since you received it, how long you owned it, and whether you’re organized as a sole proprietorship vs LLC vs corporation.
Crypto Taxes for Sole Proprietorships, LLCs, and S-Corps
Profit “passes through” to individual income taxes for these types of businesses. If you earn revenue in crypto, it’s treated the same as if you were an employee.
If you sell your crypto after you’ve received it, capital gain taxes apply:
- Short-Term Capital Gains: If you sell your crypto within one year of purchase, your profits are taxed according to regular income tax brackets. That means if your top tax rate is 22%, your gains will be taxed identically.
- Long-Term Capital Gains: Rates are still determined by your regular income, but holding your crypto for longer than one year will result in considerably lower taxes.
Look closely at the chart below; long-term capital gains brackets differ from regular income tax ranges.
Crypto Taxes for C-Corporations
Unfortunately, C-Corps don’t enjoy any favorable capital gains tax rates, regardless of profit levels or how long the crypto has been held.
As with pass-through entities, if you received crypto as payment for services, it’s taxed according to its fair market value as if you had received USD. When C-Corps sell assets, capital gains are assessed at the current corporate income tax rate of 21%.
State Capital Gains Tax
Remember that some states charge capital gains tax in addition to federal levies.
The rates vary from state to state, ranging anywhere from 0% in Texas to 13.3% in California.
These can significantly impact your overall tax liability, so be sure to check which rate applies to your business. This information should be available on your state government’s website.
Indinero, Your Crypto Tax Accountant
With over fifteen years in business and 200 accountants on staff, indinero has the expertise to serve you. Over fifty percent of our clients save more on their taxes when they file through us.
Schedule a no-obligation consultation with us today.
How to Report Crypto on Taxes
If you’re using cryptocurrency for transactions in your business, the added tax complexity can be overwhelming. However, it won’t feel so difficult once you understand the rules.
Crypto Tax Forms
For business owners operating pass-through entities, income earned in cryptocurrency is reported on individual income tax form 1040. If you’ve sold any crypto during the year, you’ll use form 8949 to declare transactions and 1040- D to report capital gains. The newest editions of these forms include a section specifically for digital assets.
C-Corps are a little different—they’ll file form 1120 for income taxes and 1120-D for capital gains.
When calculating your income or capital gains rates, don’t make the mistake of using a single price to translate the value of crypto to USD. Asset values fluctuate over the course of the year, so the fair market price of the currency at the time you receive it is what counts.
Keeping track of details like these is why it’s so important to have a system for tracking business expenses.
How to Claim Crypto Losses on Taxes
A taxable event must occur before you can claim your losses. In other words, you have to sell or trade the cryptocurrency.
Losses can offset capital gains in other asset categories, such as stocks or real estate, or up to $3,000 in personal income tax. If the loss exceeds $3,000, it may be carried forward and used in later years.
To claim losses on crypto, you’ll go through the same process as with a regular stock. File the forms listed above and note the gains or losses appropriately.
When Do You Have to Report Crypto On Taxes?
Taxes for cryptocurrency are due at the same time as individual income or corporate tax.
- Individuals, sole proprietorships, and single-member LLCs are due April 15th.
- Partnerships, S-Corps, and multi-member LLCs are due March 15th.
You can also bookmark this page, which we update any time there is a date change: When are taxes due?
What Happens if You Don’t Report Cryptocurrency on Taxes?
The decentralized nature of blockchains has led many to believe their crypto trades are hidden from the government. As many IRS audits have shown, this is not the case.
Blockchains are decentralized public ledgers that anyone can view. Once a digital wallet’s address is matched to a person or business, all trading activity can be identified. Additionally, most modern crypto trading happens through public exchanges. These companies send forms to the IRS for all traders who earn over $600 in a year.
If you don’t disclose cryptocurrency activity, you’re subject to the normal penalty for filing business taxes late.
How to Avoid Capital Gains Tax on Cryptocurrency
Unfortunately, there’s no way to avoid capital gains tax entirely. However, there are a variety of techniques for minimizing your tax bill.
Holding Periods
Since short-term capital gains are significantly less than long-term, the simplest way to reduce this tax is to hold your asset for over a year.
However, this can create trouble for business owners who need cash flow soon. In this case, it may be financially advantageous to apply for a business loan rather than sell your cryptocurrency. The amount you save on capital gains by waiting to sell could outweigh the interest you’d pay on a loan.
A member of indinero’s fractional CFO services team can help you make this decision.
Tax-Loss Harvesting
This strategy is similar to using net operating losses to reduce your tax burden. It involves selling crypto at a loss to offset gains from other investments.
Since the IRS treats stocks and crypto differently, this works even better for cryptocurrency. Stocks are subject to the “wash” rule, which forbids investors from tax harvesting by selling at a loss and immediately repurchasing the same stock.
Crypto isn’t subject to this rule. If your crypto has lost value, you could sell on a down day, realize the loss, and immediately purchase again. It isn’t ideal to experience losses in the first place, but with this method, you can make the best of a bad situation and save yourself some money.
Utilize Tax-Advantaged Accounts
If you’re investing for retirement alongside running your business, you can use a self-directed 401(k), traditional IRA, or Roth IRA to minimize taxes on cryptocurrency investments.
These vehicles allow you to choose when you pay income taxes: either when assets are placed in the account, or when they’re eventually withdrawn. With this knowledge, you can make a strategic decision on which tax timing is best for you.
Charitable Donations
Since charitable donations are tax-deductible, you can contribute to causes you’re passionate about and take a tax write-off for the cryptocurrency’s fair market value.
Bear in mind that even though a donation is a write-off, it won’t save you money. Instead, it reduces your tax bill by lowering your taxable income; the net tax savings will always be less than the donated amount.
Incorporate in Income-Tax-Free States
While most states levy a small capital gains tax, the following don’t:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Some of the other 41 states are more favorable to capital gains than others. If you haven’t incorporated, it’s worthwhile to choose intentionally.
Conclusion
By recognizing taxable events, accurately calculating your obligations, and utilizing tax-loss harvesting and long-term holding, you can effectively minimize your crypto tax burden and remain compliant with the IRS.
For help with cryptocurrency or other business tax service needs, contact indinero today.
