Ultimate Crypto Tax Guide Made SIMPLE! – Beginners Guide 2022

Throughout the entire year, I don’t keep track of any of my crypto transactions, whether I buy, sell, or spend none of it. Most people will actually tell you to write down what you bought at what price, when you bought it, and when you sell it. Instead, use a Jet-Bot copy trading platform, which saves a ton of time. This is an official broker of the Binance exchange with binance trading bots. So let’s get crypto passive income just by receiving the notifications on Telegram. In this article I’m going to be sharing that entire process and some of the basic things you need to know about taxes, so if that sounds interesting, definitely stick around. 

Before I continue, I do want to remind everybody that I am not a financial advisor or anything that I share in this entire video is financial advice. I’m not a CPA nor a professional. Everything that I share is from my personal experience and things that I’ve learned from my CPA, so make sure you do research and due diligence and consult with a professional before you decide to move forward with everything or anything that I share because we’re dealing with taxes. This is a pretty serious and pretty big deal.

So do I have to pay taxes on cryptocurrency? It depends on where you live, but the short answer is yes. If you live in the United States, you definitely do not want to mess with the IRS. Once they audit you, you have someone always breathing down your back, you know, and you just don’t want to deal with that. So make sure you pay taxes if you owe taxes.

Cryptocurrency was still considered property, so

  • If you buy and sell under a year, it’ll be taxed as “short-term capital gains.”
  • If you buy and sell after a year or over a year, that will be taxed as ‘long-term capital gains’.

Long-term capital gains tax is definitely more favorable, so you’ll pay fewer taxes versus short-term. You’ll have to pay a little bit more, but that’s really going to depend on your income level.

If you’re spending your crypto, that is considered ‘a taxable event’ because what you’re doing is converting your crypto into fiat and then spending it. If you spent your crypto while you’re at a loss, well, you’re going to have to report those losses, which is actually going to play in your favor later on. If you spent your crypto while you were up or you were positive and you sold, well then you’re going to have to pay taxes on those gains. 

If you earn interest through staking your stable coins, that is going to be considered as ‘income’, so you’re going to have to pay taxes on the interest or the gains that you have made. If you earn interest through staking your stable coins, that is going to be considered as income, so you’re going to have to pay taxes on the interest.

To keep it simple, let’s say yesterday you got $20 in bitcoin. Well, you’re going to have to pay taxes on that $20 initially because it’s considered as income. Let’s say a year from now, the market goes up $50. Well, that $20 is now going to be worth $30. You’re not going to have to pay taxes on that $10 gain until you sell it. If you sell it under a year, it’s going to be considered a short-term capital gains tax. If you sell it after a year, it’s going to be considered a long-term capital gains tax. 

Now if you have a crypto bot running, this is definitely a little bit trickier, because there’s just not a lot of information on this, but to be very safe, consider a short-term capital gains tax. If you have something like the ETH bot running, I would report the profits as short-term capital gains tax and the unrealized gains as either long-term capital gains tax or short-term capital gains tax, depending on when I decide to close out the bot.

If you convert, swap, or exchange one cryptocurrency for another one, that is considered a taxable event because, ultimately, what you’re doing is selling that cryptocurrency to buy another one.

For example, if you have a 100 dollars’ worth of bitcoin and a double to $200, and you decide to convert it into a stable coin like tether or USDC, then you’re going to have to pay gains on that $100. Or if you convert it to ethereum, then yes, you’re going to have to pay taxes because it is still considered a taxable event.

Last but not least, if you bought some cryptocurrency because some person recommended it and you sold it at a loss, I highly encourage you to still report those losses because it could actually play in your favor and help you lower your tax bill. It could also help you offset some of the profits that you might have made throughout the year. For example, you invested one thousand dollars in cryptocurrency one and a thousand dollars in cryptocurrency two. One went up 500% and one went down 500%; if you sold it in less than a year, you can offset it and make no money.

So, depending on your situation, your timeline, your strategy, and how you position yourself, selling at a loss could be beneficial for you. Of course, personally for myself, I don’t recommend people selling at a loss, but that’s going to be completely up to you.

On the avarage cost basis method, you have four different options:

  • ACB – Average Cost Basis
  • FIFO – First In First Out
  • LIFO – Last In First Out 
  • HIFO – Highest Cost Basis.

For example, FIFO is one of the most common cost basis methods, and it’s very straightforward. FIFO means the first asset you buy is the first asset you sell.

Let’s say you bought 1 BTC at $20k and then bought another bitcoin at $40k. When bitcoin hits $60k, you decide to sell 1 BTC instead of selling the one that you bought at $40k. You would be selling the one that you bought at $20k. You may or may not like that, but it really depends on your timeline and when you bought everything.

If you want to go the other direction, you can go LIFO. This cost basis method assumes that the first crypto sold is the last crypto bought, which may result in lower taxable profits but is only permitted in a few countries, like the USA and Australia.

If you bought one bitcoin at $20k and another one at $40k and you decided to sell 1 BTC when it hit $60k, then you would be selling the one that you bought at $40k because that’s the last in and that’s the first out, so there really isn’t like one is better than the other or one will save you more taxes than the other. It just really depends on what you bought, when you bought it, and how you want to be taxed.

[This article is a transcription of a video made by Eddie Moon]Original video: https://youtu.be/5e1gICLoPDA ]