BlockFi has introduced the BlockFi Interest Account (BIA) where clients can securely store their Bitcoin or Ether at BlockFi and receive 6.2% annual interest, paid monthly in cryptocurrency. This is a fantastic way to take advantage of the magic of compound interest to help you accumulate more Bitcoin or Ether over time. And yes, just like any other interest-bearing account, you are required to pay taxes on the income you generate from your BIA account. The amount of taxes you pay varies on your individual financial situation, which we review below. Learn more about how BIA works.
Additionally, BlockFi’s other product, crypto-backed loans, are a great way to free up cash without having to sell your crypto holdings — which often trigger a taxable event. This is a great tactic for freeing up cash to pay taxes on your capital gains, without having to sell your crypto.
What are the tax implications of the BlockFi Interest Account?
After speaking with our tax consultants at ZenLedger.io, here’s the two most important things to keep in mind.
Yes, you have to pay taxes on the interest you earn from BlockFi.
Since the interest is paid monthly in crypto, you will be taxed at the fair market value of the crypto you receive. This will be taxed at your income tax rate. If you then hold this crypto and sell at a later date, it will be taxed as a short or long term capital gain, depending on how long you’ve held your coin. The cost basis will be what the fair market value was when you received it as an interest payment.
BlockFi’s Interest Account works hardest for you as a long-term investment.
Crypto interest accounts are designed to hold your wealth for the long term. In the United States, short-term and long-term capital gains are taxed differently. Long-term capital gains are taxed at a lower rate than short-term capital gains, which make interest accounts an enticing tool to grow wealth in the long-term. Interest accounts also give compounding interest the time it needs for individuals to attain the rewards.
Interest accounts that compound interest add the interest you earn to your principal balance at the beginning of every month. This means that your long term earnings potential with compounding interest (as opposed to simple interest) is vastly higher. Learn more about how earning compound interest works with BlockFi products.
Cryptocurrencies are subject to positive and negative changes in value over time, but because your crypto is held within an Interest Account and not sold off, there are no tax implications from simply holding your assets in the account. Outside for the interest you earn, your crypto is only taxed when sold or exchanged for another coin.
How to claim interest from a BlockFi Interest Account on your crypto taxes
The law requires that you pay taxes on interest earned from a savings account. The crypto you keep in a savings account is not taxable, however the interest you earn on your savings account typically is (unless, for example, it’s an IRA). How much you will pay will depend on your income and tax status, which will determine your marginal tax rate.
Paying Taxes on BlockFi Interest Account Earnings
In the U.S., all interest that you earn on a savings or checking accounts is taxable as ordinary income, making it equivalent to money that you earn working at your day job. As a result, the tax rate can vary depending on your individual situation.
By law, all interest earned on a BlockFi savings account is taxable. BlockFi will send you a 1099-INT form known at the beginning of every year, which will show you the total amount of interest you earned and must report to the IRS.
At the beginning of every month, you will also get a statement with your interest account balance and the amount of interest you accrued, displayed in both crypto and USD value at the time of payout. This will make it considerably easier for you to claim on your taxes and removes the need to retroactively record fiat values of the crypto you earned throughout the year.
Calculating the amount of taxes due on savings account interest
One way to calculate the amount of taxes that you have to pay on earned-interest income is to find your marginal tax bracket, or the bracket in which your last dollar of taxable income falls.
The table below shows tax brackets for the tax year 2018. These tax brackets change each year as they are adjusted higher for inflation. However, for illustration purposes, the tax brackets for any year will work fine for example purposes.
For example, if you earn $157,400 from your job as a blockchain developer you would reach the top of the 24% tax bracket. Earning an additional $1,100 in interest from your BlockFi Interest Account would move you into the 32% tax bracket. The $1,000 from your interest which surpasses your original tax bracket is taxed at 32% This means you’d owe $320 for taxes on your interest. The rest of your income would be taxed at the marginal tax rate it fell into.
As you juggle these complex crypto tax issues, consider using powerful software like ZenLedger. ZenLedger helps you easily calculate your capital gains or losses, showing you where to sell coins at a loss, ensuring that you never overpay on taxes.
The information in this article is for general purposes only and should not be interpreted to indicate a certain result will occur in your specific legal situation. The information is not legal advice and does not create an attorney-client relationship. Changes to the Internal Revenue Code may be retroactive and could significantly alter the opinions expressed herein. You should consult an attorney or accountant to discuss your specific situation.