Crypto Tax Tips: How to Navigate Different Types of Crypto Income

three image panel of bitcoin mixed with euros, bitcoin mixed with dollars, and a computer displaying a crypto trading program.

Today, we’re diving into the world of crypto investing, discussing various crypto income types and how they impact your taxes.

(This post is from our series of Facebook Lives. Catch the next one on our Facebook channel.)

Introduction

It’s Thursday, and that means it’s time for another round of Thursday Tax Tips with Beta Virtual Assistance!

Hodling – The Buy-and-Hold Strategy

The term “Hodling” originated from a typo but is now synonymous with the buy-and-hold strategy. If you hold your crypto assets for over a year in many countries, they typically qualify for long-term capital gains, resulting in lower tax rates.

However, be cautious if you’re running trading bots alongside your long-term holdings. High-frequency trading generates numerous short-term trades, often taxed at the highest income tax rates in your country. It’s much better to separate out your short-term trading strategies from your long-term trading strategies and then make sure that your crypto tax software will assign the correct cost basis to benefit you.

Crypto Income from Staking and Interest-bearing Assets

If you earn crypto income by staking or holding interest-bearing assets, this usually falls under short-term income, subject to higher income tax rates.

But here’s a tax strategy to consider: If you deposit crypto into a protocol and leave it there for over a year, when you receive the asset back, it should qualify for long-term capital gains (even though any income received will generally be taxed at your short-term/ordinary income tax rates). This approach could result in lower tax rates.

Understanding Return of Capital

Take, for example, protocols like the Drip Faucet where you deposit crypto and receive returns. Is this income or a return of your capital? Many argue that any funds received back until you have recovered your initial deposit should be considered a Return of Capital. This approach can be beneficial in reducing your taxes because you won’t have to pay taxes on funds received until you start earning more than you put in.

Tax Software and Proper Reporting

Your choice of tax software matters. Some tax software may mistakenly categorize your crypto income as full capital gains, potentially leading to overpaying taxes. It’s crucial to ensure that your tax software accurately reflects your crypto transactions, especially in cases of income and return of capital.

Stay Informed About Financial Trends

view of a skyline with many tall bank buildings

In other news, financial institutions are increasingly trying to control your money. An interview featured by Breakout Solutions (title: Australian Banks War On Cash – Ushering in CBDCs) sheds light on how banks already are freezing customer funds, making it essential to stay informed about these developments and potential threats to financial freedom.

Final Thoughts

In an ever-evolving financial landscape, understanding the implications of different crypto income types and staying vigilant about your finances are essential. Remember to explore our new mini-course on The Crypto Tax Matrix, which provides valuable insights into managing your crypto tax obligations.

Join us on Tuesdays and Thursdays at 4 p.m. Eastern for more crypto tax tips and feel free to reach out with your crypto tax questions. Stay safe out there, and keep a close eye on your money because, as recent events have shown, it’s not always as secure as we’d like to think.

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Did you read our previous post about crypto taxes titled: “Crypto Loan Pitfalls: Avoiding Tax Traps in a Volatile Market“

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