Tax on Crypto Interest: How Does it Work?

Crypto platforms provide different investment options that help you earn crypto interest. Since the earnings add to your income, they are subject to tax. This could be either an income or capital gains tax depending on how you earned the crypto interest.

Introduction

Cryptos take investing to another level. They introduced simple ways of earning passive income, which explains their recent dramatic growth. However, most crypto investors are usually confused about whether to include their earned interest income when reporting taxes. You may have the same dilemma.

If you usually earn interest from crypto investments, then you must pay taxes. However, there are some special cases when you might not be required to unless certain conditions are met. Today’s post will explain how crypto interest taxes work. To learn more, keep reading.

Understanding Cryptocurrency and Taxes

Cryptocurrencies have always been a mystery to many people, including governments. However, most governments are now trying to understand how cryptos work. Some just ban crypto altogether. This is mostly due to a large number of people turning to crypto, making it hard to tax their transactions. However, those that have embraced crypto are developing tactics to help tax many crypto transactions.

The IRS hasn’t explicitly released guidance for taxing cryptocurrency transactions. But they have provided the general guidelines they’ll be using to determine crypto tax. Also, President Biden’s infrastructure bill requires all parties that facilitate crypto transactions to provide tax reporting information to the involved users and the IRS. The stipulations for crypto taxes don’t go into effect until January 2024, leaving companies able to lobby for a change in the legislation before the deadline.

What Is Crypto Interest?

Crypto platforms allow you to deposit assets in an interest account to help earn crypto interest. Your passive income from other crypto investments, such as lending, also counts as crypto interest. You can earn this interest on the same digital asset you invested in or a different one, such as stablecoins.

Is Crypto Interest Taxable?

Most countries, including the US, consider cryptocurrencies as property. This means that any interest from crypto investments qualifies for taxes. You must recognize your crypto interest based on the FMV (Fair Market Value) of the earned digital asset at the time of earning.

Furthermore, crypto earnings boost your monthly or yearly income, thus putting you in a different income tax bracket. Therefore, you will be taxed depending on your new income bracket.

Crypto interest taxes are usually divided into two groups:

Ordinary Income Tax

If you stake, mine, or earn crypto in any form, the government recognizes this as taxable income based on the assets’ FMV.

Capital Gains Tax

If you hodl digital assets, then sell or dispose of them later, the difference between the FMV at the time of purchase and the sale constitutes a taxable capital gain or loss. Also, if you convert crypto assets into fiat currency, and there’s a difference in the value that you bought the crypto at, you must pay capital gains tax.

However, note that buying and hodling crypto does not attract taxes. This also applies even if the hodled asset increases value during the involved period. An asset only qualifies for tax if you sell it.

Other not-taxable events to remember include:

  • Donating digital assets to a tax-exempt non-profit or charity. However, ensure you verify if the organization is tax-exempt.

  • Receiving a crypto gift. If someone gifts you crypto, you don’t need to file any tax return. However, if you sell the received assets or stake them to earn interest, you must pay taxes.

  • Gifting crypto. Gifting crypto is usually tax-free, but this has a $15,000 limit. So, bigger gifts might attract taxes. However, this limit does not apply to spouses. If you are not buying goods or services from someone and you send them crypto, that also counts as a gift.

  • Sending yourself crypto. Transferring digital assets between your crypto wallets is not a taxable event.

See countries with the least crypto tax.

How Crypto Interest Tax Is Calculated

Crypto transactions can sometimes be hard to keep up with, especially if you have invested with different crypto exchanges. It also gets tricky since you must separate taxable events from non-taxable ones to ensure accuracy. Fortunately, you don’t have to do all these things manually. There is now crypto tax software that helps you track and calculate your crypto interest. This allows you to quickly determine your taxable events and report them accordingly.

However, these tools usually function differently. For instance, Coinbase’s software calculates different transactions and generates a report containing your capital gains and losses for a certain tax year. However, this tool only provides information about Coinbase transactions. Therefore, this software may not be for you if you use different platforms.

Koinly’s tax software is another great option to use. This tool lets you import crypto transactions from different platforms. It then automatically scans them and specifies which are taxable. Koinly also supports many centralized finance platforms, so you should be able to calculate and report taxes quite smoothly.

However, note that the report generated by crypto tax software is not an official tax document. So, ensure you countercheck the provided details for accuracy.

How Can I Report Cryptocurrency Earnings for Taxable Events?

As with all tax reporting, you submit your taxes when you file for that year. Therefore, you must consider all your transactions within that financial year. If your business receives crypto payments, it must include those transactions when filing income taxes.

Most crypto interest earnings are usually filed on form 8949. This form may require you to provide the following information:

  • The name of the crypto asset you traded

  • When you acquired the asset

  • When you traded, sold, or disposed of the asset

  • Proceeds from the trade

  • The cost basis (how much you paid for the asset or its value when you received it)

  • Gain or loss

This list can serve as a guide when reporting taxes for taxable events to ensure full disclosure.

Learn more

Follow our five crucial steps to accurately and easily track and report crypto tax.

Conclusion

Crypto interest counts as income. We hope this article has properly explained why that is and how it works. However, note that most governments have varying crypto tax laws. Therefore, make sure you verify the specific laws for your location to avoid any legal issues. You could also seek advice from tax professionals to help you understand crypto interest laws better.

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