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If you’re thinking about cashing in on your cryptocurrency gains, you might be wondering if you have to pay capital gains tax. The answer is…maybe.
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Introduction
Cryptocurrency is a type of digital asset that uses cryptography to secure its transactions and to control the creation of new units of the currency. Cryptocurrency is decentralized, meaning it is not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Cryptocurrencies are often traded on decentralized exchanges and can also be used to purchase goods and services.
Capital gains taxes are levied on the profit realized from the sale of an asset. For cryptocurrency, capital gains taxes are owed when you sell or trade cryptocurrency for more than the purchase price (the cost basis). If you hold cryptocurrency for less than one year before selling or trading, your capital gains or losses will be short-term and taxed at your ordinary income tax rate. If you hold cryptocurrency for more than one year before selling or trading, your capital gains or losses will be long-term and taxed at preferential long-term capital gains tax rates, which are 0%, 15%, or 20%, depending on your tax bracket.
When you sell or trade cryptocurrency, you need to calculate your gain or loss to determine how much tax you owe. To calculate your gain or loss, subtract your cost basis (what you paid to acquire the cryptocurrency) from the proceeds (what you received from selling or trading the cryptocurrency). If your cost basis is greater than your proceeds, you have a realized loss which can be used to offset other capital gains or up to $3,000 in ordinary income ($1,500 if married filing separately). If your proceeds are greater than your cost basis, you have a realized gain which is subject to capital gains tax rates.
If you receive cryptocurrency as payment for goods or services, then you will need to include the fair market value of the cryptocurrency in your income. The fair market value is determined by the price of the cryptocurrency on the date it was received. For example, if you were paid in Bitcoin for consulting services rendered on January 1, 2020 and Bitcoin was worth $7,000 on that date, then $7,000 would be included in your income for 2020. You would also have a cost basis of $7,000 in Bitcoin which could be used to calculate any gain or loss if and when you sold or traded that Bitcoin.
What is capital gains tax?
A capital gain is the profit you realize when you sell or dispose of a capital asset, such as a stock, bond or real estate. The Internal Revenue Service taxes capital gains at different rates than other income, such as wages or interest, and those rates vary depending on how long you owned the asset and your filing status. More specifically, long-term capital gains — assets you held for more than a year — are taxed at lower rates than short-term gains.
What is cryptocurrency?
Cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.
Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Since then, numerous other cryptocurrencies have been created. These are frequently called altcoins, as a contraction of “bitcoin alternative.”
Are there any exceptions to paying capital gains on cryptocurrency?
The answer to this question depends on a few factors, including the type of cryptocurrency you have and where you live. In general, however, you will likely have to pay capital gains tax on your cryptocurrency if you sell it for more than you paid for it.
There are a few exceptions to this rule, however. For example, if you use cryptocurrency to purchase goods or services, you may not have to pay capital gains tax on the transaction. Additionally, if you hold cryptocurrency for less than a year before selling it, you may be subject to short-term capital gains taxes, which are typically lower than long-term capital gains taxes.
Of course, it’s always best to speak with a tax professional to determine whether or not you’ll owe capital gains tax on your cryptocurrency. They can help you calculate your taxes owed and file your return in compliance with the law.
How do I calculate my capital gains?
The first step is to calculate your cost basis. This is the original value of your investment, including any fees or other costs associated with purchasing the asset. For cryptocurrency, your cost basis is usually the price you paid (in USD) at the time you purchased the coins.
Once you know your cost basis, you can calculate your capital gains (or losses) by subtracting your cost basis from the current market value of your investment. If the resulting number is positive, you have a capital gain; if it’s negative, you have a capital loss.
For example, let’s say you purchased 1 Bitcoin for $10,000 two years ago. Today, Bitcoin is worth $12,000. In this case, your capital gain would be $2,000 ($12,000 – $10,000).
It’s important to note that you only incur a capital gain (or loss) when you sell or dispose of your asset. If you hold onto your cryptocurrency and it appreciate in value, you won’t owe any taxes on those gains until you sell or trade them for another asset.
How do I pay capital gains tax on cryptocurrency?
If you realize a capital gain from the sale of cryptocurrency, you will be subject to capital gains tax. This is true whether you sell crypto for fiat currency (e.g. US dollars) or for another cryptocurrency. When you sell cryptocurrency, you will need to calculate your gain or loss from the sale and report this on your taxes.
If you have held the cryptocurrency for less than a year, your gain or loss will be considered a short-term gain or loss and will be taxed at your marginal tax rate. If you have held the cryptocurrency for more than a year, your gain or loss will be considered a long-term gain or loss and will be taxed at a lower rate.
You may also be subject to other taxes when you sell cryptocurrency, such as state taxes or self-employment tax if you are selling crypto as part of a business.
Conclusion
In the end, whether or not you have to pay capital gains on your crypto will depend on a few factors, including how long you held the crypto, what country you’re in, and what the value of the crypto was when you sold it. However, it’s always best to consult with a tax professional to make sure you’re doing everything correctly.
