In this article, we will discuss how to pay tax on crypto interest payouts and staking rewards.
In general, cryptocurrencies have a tendency to sow confusion about taxes. There are many different ways to earn cryptocurrency passive income and therefor many tax categories such as interest payouts, staking rewards, airdrops and mining rewards.
Here, we will focus on crypto savings accounts which generates interest payments and staking rewards.
If you plan signing up for a crypto interest and savings account, how can this affect your tax filing?
Here’s everything you need to know regarding taxes on crypto interest payouts and staking rewards.
How Are Cryptocurrencies Taxed?
Before understanding what happens to your crypto interest accounts, it’s important to know how are cryptocurrencies taxed in general.
In most countries, including the US, Crypto is treated as property and undergoes the same taxation as any other.
Cryptocurrencies are not treated as currencies.
Whether it’s a non-fungible token (NFT) or crypto trading, you will face the same tax implications. In the same vein, your crypto will also be subject to appropriate tax refunds.
The IRS deems every crypto transaction reported for whatever value is being traded, from small-time to large-scale gains. Every taxpayer in the US needs to keep a record of every trade done with cryptocurrencies. These include
- Buying
- Selling
- Purchase with any cryptocurrency
What does this mean for you?
Every transaction within your crypto wallet, including your crypto interest payouts to a savings account, are taxable. The operative term here is “transaction”. Note, a transfer from one wallet to another wallet is not a taxable event.
How Are Crypto Interest Payouts Taxed?
Now that we know that cryptocurrency transactions are taxable, how will crypto interest payouts be taxed?
Much like investments, you have to pay taxes on the interest that your cryptocurrencies earn inside an interest account. You will be taxed for the fair market value of the crypto you receive as interest.
Example
- Alice holds 1 BTC worth $10.000 and receive a Bitcoin interest payout of 0.01 BTC worth $100 in January.
- In February Alice receives another 0.01 BTC worth $110 in an interest payout.
- Now she has to file income tax for $210 dollar regardless what the Bitcoin is worth in the end of the year (if she hold on the Bitcoin and doesn’t sell any)
- Also, Alice needs to keep track on the BTC value when she receives the interest payouts since this will affect the gain in value once she sell Bitcoin.
Short term VS Long term Holdings for US citizens
At the same time, as we said before, in the US you will also be taxed if you sell the crypto value at a later date. Depending on how long you hold onto the amount, it will be taxed as a short or long-term capital gain. This detail is a common issue for newbie crypto investors who don’t realize how gains are taxed if you haven’t owned any crypto for too long.
If you hold onto your crypto for more than a year, at the very least, you would need to pay taxes on your cryptocurrency as a long-term capital gain. As long-term capital gain rates are much lower than short-term gains, you would likely want to go through this route.
As with any investor, if you’re the type who likes taking gains against the volatility of the crypto market, your crypto will be taxed as a short-term capital gain. The latter is equivalent to an investor’s ordinary tax rate, which can be much higher.
As for your interest rates, the value of your taxes depends on how often your service provider updates your interests. A monthly interest rate means your interests are subject to short-term gains.
Use a crypto Tax Software to File Interest Payouts
How you can you file your crypto interest payouts into your tax file the easiest way?
There are many different crypto tax software that will automatically import all your transactions via an API and categorize them correctly and automatic.
In the table below, we have summarized some of the crypto tax software.
However, you can also visit this blog post where all the best crypto tax software is listed for more extensive information about each one of them.
