How to Pay That Crypto Tax Bill While Still HODLing

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When it comes to weathering the ups and downs of the crypto markets, enthusiasts have a term to invest for the long term. “HODLing” might sound like a weird typo, but it actually means “hanging on for life.”

It might sound funny if you haven’t invested dollars or time into tracking crypto prices, but not so much if you’ve watched your crypto fortunes boom and bust over time, and you’re just waiting. to see what happens next.

If you are currently clinging to your crypto assets over selling, you may also be wondering how to pay your crypto tax bill or if you even owe one. I reached out to experts on when you owe (and don’t owe) crypto taxes, and here’s what they said.

Close-up woman filling personal income tax return form,

getty When you don’t owe any taxes

First of all, it is important to know that HODLing your crypto may not incur any sort of tax bill. Nicholas B. Creel, MA, JD, LL.M., Ph.D., who is an assistant professor of business law and ethics at Georgia College and State University, says you really don’t have to worry about earnings cryptographic only when you realize any gain in their value.

You don’t have to worry about taxes if you buy and hold the asset without any other activity, even if its value increases significantly, he says. If you were lucky enough to buy a single bitcoin when it cost $10,000 and the same coin is now worth $37,000, for example, you won’t owe taxes on that gain as long as you don’t. will not have sold.

Coinbase also points out other scenarios where you probably don’t owe any tax on your crypto. This includes when you receive cryptocurrency as a gift or when you give crypto assets as a gift to someone else (up to IRS annual limits). You also don’t owe taxes when you transfer crypto between different accounts you own.

That said, Coinbase also emphasizes on its website that it does not give tax advice and that you should consult a tax professional regarding your own tax situation.

When You Owe Crypto Taxes

Either way, there are plenty of situations where you will have to pay tax on crypto gains, even in some cases where you might not feel like you are selling. Creel uses the example of crypto traders reinvesting the gains from selling crypto into another cryptocurrency, which is common.

“Be aware that you are liable for taxes related to the capital gain of your first sale, even if the value of the new cryptocurrency you invested in later pools of value,” he says. “The only way to reduce this tax burden is to formally realize a capital loss to offset the prior gain.”

Here is another scenario where you will have a crypto tax bill every time you earn interest on your crypto deposits.

According to David Kemmerer, CEO and co-founder of CoinLedger, many market participants deposit their cryptocurrency in interest-earning accounts (i.e. crypto savings accounts). A good example of this is the BlockFi Interest Account.

“That interest earned by depositing your crypto is a form of taxable income,” says Kemmerer, adding that there are millions of cryptocurrency users today who use crypto to generate income in this way.

Finally, CoinMarketCap Vice President Shaun Heng says it’s important to note the distinction between taxing capital gains and taxing income. If you sell bitcoin at a profit, that’s considered a capital gain, he says, adding that the same goes for converting crypto assets into another type of crypto.

“However, things like staking, airdrops, and cryptocurrency mining are considered taxable income and are taxed at a different rate than capital gains.” Heng said.

Also, if you have ever purchased an NFT, you probably owe taxes on the cryptocurrency you purchased the NFT with!

Of course, there are other situations where you may owe taxes on crypto gains, and some of them depend on your situation. If you’re unsure or even on the fence, it’s probably wise to consult with a tax advisor about your personal tax information before filing.

How to Track Crypto Taxes

Over the past few years, many different software tools have been created to help individuals track crypto taxes. This is important, because in a decentralized ecosystem, you won’t necessarily get tax documents that you can use to file your taxes (but you’re still responsible for the taxes you owe).

According to Kemmerer, CoinLedgers CryptoTrader.Tax is a cryptocurrency tax reporting platform that “integrates across the web3 economy and gives crypto investors a holistic view of their digital asset portfolios.” . This not only helps them easily track their assets, but it also allows them to prepare and pay their taxes confidently and accurately,” he says.

If individuals want to see what their taxable crypto income might look like, they can sign up for CryptoTrader.Tax and directly connect their cryptocurrency platforms (e.g. Coinbase, Kraken, and Gemini, etc.).

“Whether users are trading cryptocurrencies, buying and selling NFTs, or betting on DeFi protocols, CryptoTrader.Tax makes tracking their portfolio and associated taxes as easy as possible,” says Kemmerer.

Attorney Asher Rubinstein of Gallet Dreyer and Berkey also points out that crypto platforms such as Celsius, Coinbase, and Gemini issue 1099 forms, which show the amount of taxable income you must report on your tax return. However, he also says that it is essential to keep records of crypto transactions whether you are buying, selling or HODLing. Why? Because the IRS might ask for them.

He also notes that many foreign crypto exchanges do not provide 1099s, which makes tax reporting difficult for Americans investing in crypto. If the crypto is kept in cold storage rather than an exchange that provides 1099s, the onus is on the crypto owner to keep good records, he says.

Rubinstein also points out that you can’t hide from the taxman just because crypto is considered “anonymous.” The IRS has methods to find out that you traded crypto for profit and didn’t report it on your taxes, he says. Remember, this is a public blockchain – so figuring out who traded is just a giant Sudoku puzzle for the IRS.

One method is a John Doe subpoena, which the IRS has successfully used against Swiss banks to effectively end Swiss bank secrecy. Rubinstein also points out that in March 2021, the IRS announced Operation Hidden Treasure, an enforcement initiative focused on detecting unreported crypto-related income.

With that in mind, there’s no reason to think you could get away with avoiding taxes on the gains you made from crypto, regardless of how and when you received them.

Your best bet? Count your blessings, pay your taxes and move on.

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