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How is Interest on Cryptocurrencies Taxed? Investor’s Handbook 2022

How is Interest on Cryptocurrencies Taxed? Investor’s Handbook 2022

You must pay income tax if you received interest from cryptocurrencies this year. Cryptocurrency exchanges and protocols frequently reward users with interest. Even while these bonuses might be a fantastic source of passive income, there is a tax obligation that goes along with them.

Everything you need to know about the taxation of cryptocurrency interest will be covered in this article. You will know how to record interest rewards on your tax return once you have done reading.

What is the interest in crypto?

Banks typically reward their clients with interest in return for keeping their money on deposit. The Indian Union Finance Budget states that there is 30% tax on crypto trade. DeFi protocols and crypto exchanges have lately started to provide comparable benefits, frequently with even greater interest rates.

Many centralized exchanges compensate users who retain cryptocurrencies on their network with interest payments. Exchanges can cover these incentives by lending out the cryptocurrency of its users to institutions and anyone that are interested. As an alternative, you may stake your bitcoin using a decentralized system to receive interest incentives.

Do you pay taxes on interest on cryptocurrencies?

In general, taxes on capital gains and ordinary income are applied to cryptocurrencies. You’ll recognize income based on the fair market value of your coins at the time of receipt when you get bitcoin interest. You’ll owe capital
gains tax if you ever decide to sell your rewards.

Check out our comprehensive guide to bitcoin taxation for additional details on how cryptocurrency is taxed.

Interest on cryptocurrencies is it subject to double taxation?

It’s not correct to argue that bitcoin interest is taxed twice, even if it may be liable to both income tax and capital gains tax. You will only experience capital gains or losses when you sell your cryptocurrency interest rewards, based on how the price of your cryptocurrency has changed since you first got it. Here is an illustration of how this functions.

Does the IRS get reports of cryptocurrency interest?

Usually, after a consumer has received more than $600 in bitcoin revenue, exchanges will send a Form 1099-MISC. A duplicate copy is sent to the IRS. Crypto exchanges don’t frequently utilize Form 1099- INT, the 1099 form used to declare interest revenue.

Decentralized protocols do not currently file tax returns with the IRS. It’s crucial to keep in mind that transactions made on blockchains like Ethereum are permanent and visible to everyone. The IRS has already collaborated with companies like Chainalysis to examine the blockchain and reduce tax evasion.

Do you need to disclose cryptocurrency interest below $600?

Remember, whether or not your exchange issues you a 1099 form, you must still report all of your bitcoin revenue. You must declare any revenue from exchanges that is less than $600 on your tax return. Although it is doubtful that doing this would have a significant influence on your tax liability, doing so will help you comply with the law and demonstrate that you are making a good-faith attempt to disclose all of your income.

How can I monitor my cryptocurrency’s fair market value?

You must maintain records of the fair market value of your cryptocurrency at the time of receipt in order to appropriately report your interest rewards on your taxes. Your income tax obligation will be determined by the fair market value of your interest rewards in USD. It will also establish your cryptocurrency’s cost basis, which may be used to assess capital gains and losses should you ever decide to sell it.

Use cryptocurrency tax software like CoinLedger if you’re having problems determining the fair market value of your interest incentives at the time of receipt. The pricing engine of the platform can automatically locate the previous prices of your coin.

How can I declare interest from cryptocurrencies on my taxes?

Generally speaking, cryptocurrency-related interest and staking incentives should be declared on Schedule 1 under "Other Income." You can declare your capital gain or loss on Form 8949 if you sold or otherwise disposed of any of the bitcoin interest incentives you received.