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Guide to Paying Taxes on Cryptocurrency
Guide to Paying Taxes on Cryptocurrency
Guide to Paying Taxes on Cryptocurrency
4/29/2022
Index Coop
Content
Guide to Paying Taxes on Cryptocurrency
Cryptocurrency is treated as an asset by the IRS, so two potential taxes apply: income tax and capital gains tax. If you earn cryptocurrency, it is taxed like income. If you sell, exchange, or spend cryptocurrency, it is taxed as a capital gain.
While cryptocurrency may be understood as a digital currency, for tax purposes, cryptocurrency is recognized by the IRS not as currency but as property. This means that capital gains and losses must be reported. You must pay taxes on any gains or income you earn from participating in crypto.
aSince tax year 2020, Form 1040, the income tax return, has included the question: “At any time during 2020, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?" If you answer “yes,” you will be expected to report income from cryptocurrency transactions on your tax return.
How is crypto taxed?
Buying and holding cryptocurrency are not taxable events, even if the value of your positions increase; taxable cryptocurrency events are those that cause you to recognize a gain, like selling and trading (and staking, mining, receiving an airdrop, sending a gift in cryptocurrency, and sometimes partaking in a hard fork). Note that cryptocurrency bought or traded by a tax-deferred or tax-free account like an individual retirement account (IRA) is not taxed.
Like on investments in regular stocks, the tax rate on your gains in cryptocurrency is determined by how long you held the cryptocurrency. Profits on cryptocurrency owned for less than a year before it was spent or sold are short-term capital gains, subject to your ordinary income tax rate. Profits on cryptocurrency held for longer than a year are long-term capital gains and are taxed at long-term capital gains tax rates (lower than the tax rate for short-term gains).
Take the following examples:
Gains: You buy $5,000 of Ethereum and later sell it for $8,000. You’d then need to report this 32,000 gain on your taxes as either long-term gains or short-term gains, depending on how long you’ve held the cryptocurrency you earned gains on.
Losses: You buy $5,000 of Ethereum and later sell it for $1,000. You’d recognize a loss of $4,000; this loss can offset other gains and up to $3,000 of your taxable income each year. Any unused loss can be carried forward to future years as an offset to future gains or up to $3,000 of your taxable income per year; net capital losses exceeding $3,000 can be carried forward indefinitely until the amount is exhausted.
Documents
Preparing and filing your cryptocurrency taxes can be a grueling process, particularly for first-timers. The most time-consuming and important part of the process comes first: collecting and combining all of your crypto activity.
Meet Form 8949, Sales and Other Dispositions of Capital Assets. To complete the form, you’ll need to know the date each asset was bought and sold, purchase and sale price of each, and gain or loss of each. The subtotals from this form will carry over to Schedule D (Form 1040), where capital gain or loss will be calculated in aggregate. Crypto assets earned as income need to be added to Schedule 1 Form 1040 and self-employed earnings from crypto need to be added to Schedule C.
If you have more than 15 trades, you may want to consider using a tax software solution to organize your trades in preparation for Form 8949.
Tools
Crypto tax software helps users track crypto transactions using integrations with cryptocurrency brokers, hot wallets, and other cryptocurrency platforms to automatically calculate the most important factor of crypto tax: capital gains/losses. The number of transactions necessary to report will often determine the price paid for a software.
If you primarily use decentralized exchanges (DEXs), check out:
Taxbit: Best Overall
TokenTax: Best Full Service
ZenLedger: Best Value
Koinly: Low Cost for Low Volume Traders
If you primarily use centralized exchanges (CEXs), look into:
TurboTax Premier: Best for Coinbase Users
ZenLedger: Free for Low Volume Traders
CryptoTrader.Tax: Best for Everyday Traders
TaxBit: Best for all others
Why You Should Report All of Your Trading
A common misconception is that cryptocurrency is bought and sold anonymously and thus easy to hide from tax officials. As cryptocurrency gains popularity, the IRS is ramping up enforcement of cryptocurrency tax reporting. Recall that in crypto, everything is on-chain and transactions are permanently viewable to the public. The IRS uses blockchain analytics tools that identify taxable crypto events in hot wallets and links them to individuals suspected of tax evasion or money laundering. Additionally, exchanges that provide reporting through Form 1099-B, like Coinbase, Gemini, and Robinhood, report all trades to the IRS. All major crypto exchanges must now complete KYC (Know Your Customer) for users. It is thus wise to disclose all taxable events on your cryptocurrency.
Starting in the tax year 2023, all crypto exchanges will send 1099-B forms reporting all transaction activity by the American Infrastructure Bill of 2021. This will make cryptocurrency tax reporting even more transparent.
Generally speaking, if you earned cryptocurrency profit from a different country, you will not have a US tax liability but may have tax requirements in the country where the cryptocurrency was bought and sold.
Benefits of Owning Index Coop Products
Index Coop products are structured products, meaning they provide broad exposure to the cryptocurrency ecosystem contained within a single token. This formula makes buying, selling, and trading cost-effective; it also has trickle-down effects that provide tax advantages. The two major benefits of owning Index Coop products are that they make transaction reporting simple and rebalancing is tax-free.
Transaction reporting is simple: Structured products like $DPI, $MVI, and $GMI give holders access to more than a dozen tokens by just a single purchase of the index. When these products are bought, sold, or traded, only a single capital gain/loss transaction must be reported rather than the dozens of transactions that would require reporting if you held each of the underlying tokens separately.
Rebalancing is tax-free: All Index Coop products automatically rebalance according to defined methodologies on a monthly or quarterly basis. Holders face no tax implications as no taxable event is performed; they hold the same number of tokens before and after the rebalancing, just with different allocations. Contrast that to the taxable events triggered by holding each of the underlying tokens separately and performing manual rebalances. Rebalancing manually would cause selling of underperformers and buying of overperformers which would cause both taxable capital gains events and come with typical gas fees.
Save money on taxes with Index Coop’s structured products. Check out this article for more information on tax advantages of Index Coop products.
About Index Coop
Index Coop is a decentralized autonomous organization (DAO) that powers structured decentralized finance (DeFi) products and strategy tokens using smart contracts on the blockchain. We offer a suite of sector structured products, leverage and inverse products, and yield-generating products. We aim to create products that are simple to use, accessible to everyone and secure. Our products are built on Set Protocol, a twice-audited, self-custodial DeFi tool that allows for the creation and management of Ethereum-based (or ERC-20) tokens. Among users, partner protocols, and our composable products, Index Coop maintains one of the largest partnership networks in the DeFi ecosystem.
How to buy Index Coop products with fiat currencies:
First, you’ll need to create an Ethereum wallet like Argent, Metamask, Gemini, or Rainbow.
Next, you’ll set up your new wallet and connect your bank account.
Once you’ve deposited fiat currency in your wallet you can exchange it for Index Coop products like
(DPI) or the
.
You can also earn or buy Index Coop products directly via your favorite decentralized exchange.
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FAQs
Index Coop yield tokens simplify earning yield in DeFi by automating complex strategies and diversifying across protocols. They are user-friendly and cost-efficient, appealing to both new and seasoned DeFi users.
Leverage tokens automate a leveraged position by utilizing onchain money markets like Aave or Morpho to borrow funds, amplifying a user's exposure to an asset without requiring manual management. The token's smart contracts autonomously handle the borrowing, lending, and rebalancing of assets, maintaining a consistent leverage ratio despite market fluctuations. This automation eliminates the complexities of collateral management and liquidation risks, while also charging low, transparent fees that avoid expensive funding rates often charged by perps.
Index Coop is a decentralized autonomous organization (DAO) that specializes in creating and maintaining onchain structured products. Index Coop aims to democratize access to the crypto market, empowering everyone to participate in the growing digital asset ecosystem with ease.
No, yield automatically compounds and accrues to the token price. The value of the tokens you hold in your wallet will simply go up over time without the need to claim or compound rewards.
Index Coop products protect you from liquidation with automated risk management that rebalances assets to maintain a target leverage ratio that avoids liquidation.
INDEX is the ERC-20 governance token on Ethereum for Index Coop. INDEX empowers its holders to participate in decision-making processes that shape the future of Index Coop.
Yes, all Index Coop products are instantly redeemable for their underlying value at all times.
Yes, all Index Coop smart contracts have been audited by leading independent security firms such as OpenZeppelin, ABDK, Isosiro, & more. There is also an active bug bounty program through ImmuneFi. Audit information is published in the docs here.
Streaming fees (an annual fee paid continuously block-by-block), mint and redeem fees (only on leverage tokens), and borrow costs (interest paid to borrow funds from onchain markets when using leverage).