What Everyone Needs to Know About Crypto Taxes

Are you investing in cryptocurrency? Do you know that you may be subject to taxes on your investments?  

Join me in this episode as I dive deep into the topic of crypto taxes. From capital gains to income taxes, I’ll cover the different types of taxes you need to know about. Plus, I’ll provide you with useful tips on how to properly report your crypto earnings to the IRS.

Whether you're a crypto pro or just dipping your toes into the digital asset world, this episode is a must-listen to ensure you're on top of your tax game. Don't miss out on this valuable information – tune in now!

IN TODAY’S EPISODE, I DISCUSS: 

• Taxable and non-taxable crypto transactions
• Understanding capital gains in crypto
• The importance of third-party software for crypto taxes

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Transcript

Mel Abraham  0:00  
You don't have to pay taxes on your cryptocurrency transactions. Oh man, if I had a dime for every time I heard that I'd be a wealthy, wealthy, wealthy man. Because it ain't true. It ain't true. And in fact, crypto taxes can be very complicated, and they can bite you if you're not careful. And in this episode of the  Affluent Entrepreneur Show with me your host Mel Abraham, we're gonna talk a bit about crypto taxes, so you don't get run over by the bulldozer of taxes, because you weren't on. Let's make sure that you're taking care of, I'll see you in the episode. This is the Affluent Entrepreneur Show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond well, so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect. So you can scale your business, scale your money, and scale your life, while creating a deeper impact and living with complete freedom. Because that's what it really means to be an affluent  entrepreneur.  

Mel Abraham  1:11  
Hey there, welcome to this episode, the Affluent Entrepreneur Show for entrepreneur. This one's an interesting one, we're going to talk about crypto and crypto taxes. Actually, I'm not going to talk about cryptocurrency. As an investment, I want to talk about the tax side of the investment, and what it could mean to you. Because here's what I hear. I mean, the fact is that I hear a lot of people thinking that, well, I don't have any taxable transactions with my crypto. And you might be surprised. Alright, so I'm gonna walk you through some of the key elements, I'm not going to go into the weeds on this, I want you to have a high level understanding. So you don't get blindsided because this is one of those things that, that we don't mess around with taxes, I want you, I want you to pay your fair share, but not a dime more. Okay, because we're not going to overpay our taxes, we're going to reduce our taxes to the maximum reduction possible and legal. And I actually did another video specifically on taxes. And we'll hook that up here also. So it's more general, this one's going to be related to crypto. So here's the thing. What is crypto and just in its general form, crypto is a digital asset, at least, the IRS, the taxman looks at it as a digital asset, and therefore, it's going to be treated like an asset, it's going to be treated like a stock, it's going to be treated like a bond in a sense from a tax standpoint. And, and so there are times where what you're doing with your crypto, whether it's Bitcoin, or Ethereum , or, or some other coin may not be taxable. But there's other times where it may be taxable at the highest rate. And there's other times that may be taxable at a capital gains rate. And there may be times where you don't think it's taxable, and it comes on Alright, so let's make sure that you understand the dynamics of what's going on. Because most of the time, when it's someone what someone does is they buy bitcoin, or they buy a currency with dollars, and then that currency will go up or down. And then they want to use the currency or they cash out the currency. And, and they don't realize that that's a taxable transaction. So let's just talk about the things that are not taxable when it comes to crypto, okay. If you, for instance, the the first thing is that if you just buy and hold it, so if you buy Bitcoin or Ethereum , and it's sitting in a wallet, it's not taxable, okay? So that there is now it could go up in value, it could go down in value, it's not taxable, you're not going to have an issue with that. So as long as you're not transacting it getting in and out of it, there's no there's no tax on it. If you take your crypto so that's number one is if you if you buy if you buy crypto, let me just I'll write these down. So non taxable. Non taxable is, number one is, is if you buy and hold. Okay, number two, is if you donate it, if you donate your crypto if you donate your crypto effectively to a qualified tax exempt charity or nonprofit, so it would be directly to what's called a 501 C three organization that has the ability to reach receive charitable deduction for charitable donations. Not only would it not be taxable, it effectively could be a charitable donation deduction on your personal tax returns, you can use a company or an organization like, give crypto.org dot o RG, I get nothing from it, I just if you if you're choosing to decide to donate crypto to a charity, it won't be a taxable element and it might actually give you a deduction. So that's number two. Number three. If you receive a gift, first off, good on you, you gotta get. But if you're receiving a gift of crypto, you're not typically going to incur any tax on it, the tax might be on the person who gives it, they may have to pay a gift tax on it. That's their issue. And it depends on the dollar amounts and their situation. So that typically won't create a taxable event for you, because it was gifted to you. Now what happens if you're on the other side of that, okay, if you're giving a gift, if you're giving a gift on this, year's you're not going to get hit with income tax, however, there is an annual exclusion amount annual exclusion amount which is currently at $16,000. Okay, that you can give someone up to $16,000 a year without having to pay gift tax on it. Anything above that you're either going to pay gift tax on or it goes against what you call your lifetime exclusion. So when you're giving crypto, you just got to be careful about the amount you give and be, you know, see your tax professional and your advisers to make sure that you don't trigger something that you didn't think about the typically it's not. It's not a taxable situation. And then the last on the non taxable situations is is this one is that when you transfer your crypto but you transfer it to you to yourself, in other words, you're moving, you're moving it from account to account, okay? It's not taxable, from one hand to the next, it's not taxable. Now, that doesn't mean that you're taking Bitcoin and buying Ethereum that is a taxable event. That's different. Okay? So I'm just saying that if you have Etherium, and you move it from one wallet to another, or to one account to another, not taxable. Okay, so those are the things that are not generally taxable when it comes to your crypto. Now let's talk about the ones that are taxable. Now I want to talk about the ones that are taxable by capital gains. Now, why is that? Because because capital gains has a special provision, at least for federal, some states do. Other states don't capital gains is going to be taxed anywhere from 0% to a maximum of 20%. ordinary income. This is ordinary income is going to be taxed as high as close to 40% plus state. So it's a big difference if you get capital gains treatment on your crypto, so what what constitutes capital gains? And capital gains is when you sell an asset and we said this is a digital asset, and you sell it for more than what you bought it for. So if I for instance, if I buy $1,000 A Bitcoin, okay. And it increases in value to oh, I don't know $2,500. Okay. Okay, and I sell it the difference there is $1,500. That $1,500 is a capital gain. It's taxable. Now, there's two types of capital gains, there is long term and there is short term. Long term capital gains are the ones that get the the, the advantage rates, the zero to 20% short term are taxed just like any other income. So long term is anything you hold over a year. So if I bought the Bitcoin and I held it for a year on More, I will be under the long term rates of zero to 20%, depending on my income. If I held it less than a year and sold it, then it's just going to be part of my income I want to pay at the highest rates or the Rick my highest rate there. So the typical thing that we want to try and do is if we can, we want to, we want to hold things for a year or more, so we get the advantage, right. So so when we talk about capital gains, taxable, number one is selling, what will trigger that is selling crypto for cash. for cash, okay, so in other words, we just simply sell it. That's the game, that's this whole thing of, of this $1,500. That's the game. Okay, that's going to trigger a gain. Now, what happens if it's the other way around, I bought it for $2,500. And I sold it for 1000. And I had a $1,500 loss. 

Mel Abraham  11:09  
Well, the rules to get the deduction, you can deduct your losses, against gains plus $3,000. So the maximum loss you can take in any year, over and above any gains is $3,000. So what happens if I have a $5,000 gain, I mean, a $5,000 loss, you take 3000 of it this year, and you carry the 2000 to the next year. So you carry it for you don't lose it, you just don't get it. Listen, IRS wants their money upfront. So if you make money, they're going to take the tax now, if you lose money, they'll give you a little bit of a credit and you got to carry it forward. That's that's the game. That's the rules. I don't make them. I just tell you about them. All right. So so that's that's the thing to realize that it can be a capital gain or it can be a capital loss, capital losses are limited to 3000 bucks a year over and above any gains. Okay. So what else will trigger capital gain? Number two, number two, is converting to another currency. Okay, this is this is, this is effectively, like, if we're going to take Bitcoin and I'm going to convert it to, to either, okay, Ethereum , or any, any, any other currency, the way the IRS looks at it is they look at it as two transactions, you're sold Bitcoin for whatever you sold it for, and then you bought ether. So if I was taking that same $2,500 in Bitcoin, and I'm going to convert it to ether, or Ethereum , or ATC, it doesn't matter, okay? Then they will look at it as if I sold the Bitcoin for $2,500, that would trigger that $1,500 gain, okay. And then I would buy the other currency that will trigger attacks. So anytime we get out of a currency, it triggers potentially attacks. Now, here's the other one that people don't think about. And this one can really come back to bite you when we spend our crypto. So let's say let's say that you decide that you're going to go and buy a say you're going to, you're going to go buy a computer with crypto. So I'll run through some numbers, let's say you're going to buy a computer. So you're going to buy a computer for loops. For the same $2,500 we talked about now. You you bought the Bitcoin for $1,000. And as person says, I want $2,500 for it, what's going to happen is you're going to trigger a $1,500 gain on the purchase because you basically going to it's going to be considered as if you sold it at $2,500. So I'm going to buy watch what happens. This is where it's scary. So you buy the computer for $2,500. So that's gone, okay. But now you have a $1,500 gain that you have to pay tax on. And if you're if it's long term gain, and you're going to pay 20% Not including state, then you're going to have to pay $300 in tax Even if you buy a cup of coffee with Bitcoin, it'll cost you in taxes. So there's this tax element that comes in. So when you start to use your Bitcoin or your current cryptocurrency for transactions, that's not tax efficient. So you have to be careful to not to realize that there's a taxable event if you start to do this. And so it's important to be aware of that. So you can think through how that's going to happen. Now we'll talk about how this gain can be calculated and adjusted potentially. So that's capital gains. Now let's talk about remember I said, you can be taxed as ordinary income or you can be taxed as capital gains, capital gains, if you held it over a year is more advantage because the maximum federal rate is 20%. Or ordinary income is the highest rate is going to be close to 40%. And plus your state, so it can be astronomically higher. Now, what does that mean for you? Well, let's just look at it. So now let's look at what's taxable as ordinary income. Okay, and the first one. Number one is getting paid. In crypto. This may sound like a really cool thing to do. But you need to be aware of the possible implications of what this could do. So if you accept crypto and you get paid $1,000 in crypto, then it's ordinary income. It's just like I got $1,000 that just the value is that they gave me in crypto. The way the tax code reads is that everything you receive is taxable, nothing new. You pay is deductible, less is allowed by the code. So whether you receive it in barter, whether you receive it an artwork or whether you receive it in in crypto, it's taxable at the value that it was when you did it now this came back to roost with a football player. Odell Beckham, I don't know if you heard the story, but Odell Beckham he was going to play for the LA Rams and he took his contract and he said he was going to accept $750,000 in Bitcoin he wanted to get paid in Bitcoin I did this in November, I think a year or so ago, okay. And he was going to accept seminar and $50,000 in Bitcoin. Now, the way this happens is the amount he pays tax on his what he received, so he pays tax on the $750,000 in Bitcoin, now, if he held the Bitcoin during that time, and he held it to when the Bitcoin dropped, okay, which let's let's just look at in January of 2022 Bitcoin, so when he did his contract, Bitcoin was worth 64k Okay, $64,000 a coin, okay. In January of 2022, Bitcoin had dropped and Bitcoin was only worth $35,000. Okay, watch what happens. So now his his $750,000 Bitcoin contract is only worth is, is is only worth at that point $412,000 in Bitcoin, okay. But here's the insult to injury. He's gonna pay tax on 750,000 it's ordinary income. He's in California, so he's probably going to pay about 50% of it as tax so he's gonna have to pay $375,000 on this in tax, but it's only worth 412,000. So, all of a sudden, his $750,000 contract after tax was worth Oh, I don't know $36,000. When you start to accept currencies, and I'm not saying not to do it, I'm just saying to be smart about it. But when you start to accept currencies, like cryptocurrencies, for payment of services, and you're you're in a volatile time, there's a risk that the amount you pay tax on, if it drops, is going to be far higher than the amount you actually have as an asset. Now, if he held it past January, and it moved back up, he didn't really lose anything, but I just want you to know that that exposure is there. So be aware of of that. So that's number one, getting paid in crypto, number two. Number two, is getting crypto in exchange, which is kind of like getting paid, but in exchange for goods and services.

Mel Abraham  20:50  
Okay, so in exchange for goods and services, again, you will pay ordinary income tax on it's just like selling something off of a shelf to someone else. Okay. Number three, if you mind crypto, and I'm not going to get into this, if you're doing it, you know it mining crypto is ordinary income. So you'll likely owe tax on the earnings based upon the fair market value. Now, here's something I failed to mention. But all the transaction fees and the gas fees, they're deductible against it, but they're they're minuscule compared to the amounts that we're talking about. But you still want to take the deduction. If you earn staking, staking rewards. Those are ordinary income if you earn other income, okay. So for instance, say you're, you're doing some some sort of loan protocol or like an anchor protocol or something like that, where you're earning interest, or you're getting payments on something, all of that stuff is taxable to you. It's not, it's not just free money, it's not just coming to you, you're going to have to pay tax on it. So be aware of it, that you're doing it, then there's a couple of other things that that come into play. If there's a hard fork that can where you receive more more crypto and a hard fork, that could be a taxable transaction. If there's an airdrop that could be a taxable transaction, these are terms if you're into crypto, you'll understand them. If you're not into it, it's not going to matter that much. But just know that if something like that is happening, there's taxes that you need to consider. And then then understand that that's the key to all of this, that you are potentially triggering taxes every step of the way, in trying to figure out this whole idea of crypto now, what things can you do to kind of save this off now and then I want to talk about a couple of things that to be careful about. So one is how do you calculate the gain or loss on the sale of the crypto? Now there's a couple of ways and it'd be becomes your choice. So because what happens is like, like I know my son is he's buying crypto on a on a drip plan every every month he he's slowly goes into crypto slowly goes into crypto. Well, remember we said that that if I if I bought crypto originally in 1000 bucks, and it's now valued at 2500 There's a possible gain there. But what happens if I bought a bunch of blocks of it and I said okay, I bought another block at 1500 and I bought another block at 2500 So now I have three blocks of crypto that I bought so when I so sell the 2500 Which one of these did I sell be because it makes a difference on the calculation the game you get to make a choice. You can choose what we call FIFO okay, this is first in and and if it's first in that would be this one. 

Mel Abraham  24:36  
This is FIFO or you can do LIFO which is last in and so that would be LIFO. Okay, or you can do what's called hypo which is highest. And in this example this would be high fo also or you You can do what's called specific ID. So you could say I'm selling this block specifically. But you'll see that depending on how we calculate the gain, it will change things. So it becomes really important to know the numbers, you have to track this, this is not easy. And why it's difficult is because most people don't just buy the crypto and leave it in an account, they move it around. So it's going to different platforms and different accounts. And you know, it'll, it'll go to Ethereum, and then it'll come back, it'll be in, you know, open, see, I mean, there's all kinds of things that are going on. And so one of the things that will be helpful is if you start to use third party software that can consolidate and aggregate all the information to see where the gains and losses are, and it will calculate that, that for you, there's a couple of them out there, there's Zen ledger, okay, is one crypto.com has a free one, there's Kuhn coin, tracker.io, I get nothing from any of these coin tracker.io works with Coinbase, and TurboTax, really well. So there's a couple of these things that will, will access all the different information, put it together, and track everything. So you can look at what the taxes are and, and how to do that. If you're doing more than a couple of transactions. With your crypto, I'm going to recommend that you get one of these because you need to report it, if you improperly report it, don't report it, you set yourself up for a whole lot of hurt in the future. Because I can tell you that the IRS is really focusing in the crypto space to get after it and how they're getting after it is they're going to the platforms, they're not necessarily going to the individuals like they there was a suit against Coinbase to get access to all the records and Coinbase lost. And so they had to give access to all the people that were trading on coin base, and then they started doing the audits. So So I tell you this and why I'm doing this episode is so you can stay out of water. And so I think it's important for you to start to look at that. So what are some common mistakes that I think happen? The first is this, okay. And hopefully, we took a step in the right direction for you here. And the first is is not knowing is is just not knowing and paying attention to it and just sitting back and, and just kind of walk you through, okay, you need to take the time to understand the rules, the tax rules, and how they impact you. Okay, not Rule number two is not realizing that a coin to coin transaction is taxable. If I go from ether to Bitcoin or back and forth. It's taxable, not realizing that when I use a currency to purchase something, it creates a taxable event also, okay. Number Number Three for whatever I was on gas fees are deductible not realizing that actually offsets a tax, we want to put that in there. And then the next one is to not realize that there's a difference between capital gains long term capital gains, short term capital gains, and ordinary income. Because that can be the difference between paying as much as little as zero tax to 20%. Tax to as much as 50% or more. Okay. And then another one that I think is hugely important to consider and I'll walk you through this is there's a lot of people that are out there borrowing against their crypto, and they're earning money and they're borrowing and so watch what happens if you if you're not careful here and this kind of goes to the same thing that happened with our friend Odell, but let's just assume that I have 100k in Bitcoin, okay. And I borrow 50k Using my bitcoin as collateral that's 50% loan to value basically, the provision typically in the smart contract is if the collateral loses 50% of its value, it automatically liquidates and pays the loan back. So watch what happens. You bought you bought the Bitcoin let's say you bought the Bitcoin at $10,000. So you have Bitcoin that you you, you buy a 10,000 It's worth 100,000 You get a loan of 50,000. And now you hold on to it. And now Bitcoin drops, and it's now worth 50,000. So the Exchange says, Wait a second, we're automatically going to cash out your bitcoins, so they sell your Bitcoin for $50,000. Okay, so they sell it for $50,000 Because that's what it's worth, they pay the loan back. So now the loan is paid. But what just happened? You lost your Bitcoin, the loan is gone. But what really happened here, they sold the Bitcoin for $50,000. You bought it for 10,000. So by them, then triggering the payoff, you just found yourself a $40,000. taxable gain. So you want to be careful about doing loans like this, because what can happen is if the collateral drops enough that it triggers the sale, it triggers attacks at the same time. All right, I threw a ton at you on this one. But I'm hoping to keep you out of hot water I'm hoping that you'll start to at least understand that Bitcoin taxes creep in every crevice, not Bitcoin, but cryptocurrency taxes. creep in every crevice of cryptocurrencies when you unless you're just buying and holding, okay, so when they transact it when we transfer it to another currency, when we use it to pay something when we receive it as payments, there are taxes along the way, you probably need help to track that I would use a third party software like I talked about, but by and large, you the first things first you'd use do not ignore it, because they'll they'll catch it. And if they catch it, it now becomes potential tax evasion and, and that's a problem. So I'll hook up the other tax video here. We'll hook up another video for you on what to do with your cash. I hope that you found this a value. I hope it keeps you out of trouble. If you have questions, comments or anything, do me a favor. send them my way. Post them and connect with me. All right, we'll make sure that we bring this on the show. And we help you out. All right. In the meantime, until we get a chance to see each other. Another episode show on the road. Always, always strive to win life. Thank you for listening to the Affluent Entrepreneur Show with me your host Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the Affluent Entrepreneur Facebook group now by going to melabraham.com/group and I'll see you there.