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If you’re thinking of converting cryptocurrency, you may be wondering if you’ll be taxed on the transaction. The answer is: it depends. Read on to learn more about cryptocurrency taxes and how they work.
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Introduction
Convert your appreciated cryptocurrency assets to cash without paying taxes on the investment gains. US taxpayers can avoid paying taxes on their cryptocurrency investments by converting them into fiat currency using a service like Coinbase Convert.
What is a cryptocurrency?
A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. Many cryptocurrencies are decentralized systems based on blockchain technology, a distributed ledger enforced by a disparate network of computers. A defining feature of a cryptocurrency, and arguably its biggest allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.
What is a taxable event?
Before we jump into the taxability of converting crypto, it’s important to understand what a taxable event is. A taxable event is simply a recordable transaction that has tax implications. The most common taxable event is selling crypto for fiat currency, which is subject to capital gains tax. However, there are other less common taxable events, such as spending crypto on goods and services, which may be subject to sales tax.
To figure out if converting crypto is a taxable event, we need to understand what counts as “converting” crypto. For tax purposes, the IRS considers any time you trade one type of cryptocurrency for another cryptocurrency to be a taxable event. So, if you trade Bitcoin (BTC) for Ethereum (ETH), that’s a taxable event.
However, if you trade BTC for a non-cryptocurrency asset, such as USD or gold, that’s not considered a taxable event by the IRS. So, if you convert BTC to USD and then use that USD to buy ETH, that would not be a taxable event.
The same goes for if you use BTC to pay for goods or services. If you use BTC to buy coffee from your local café, that would not be considered a taxable event since you didn’t convert your BTC into fiat currency or another cryptocurrency.
The bottom line is that whether or not converting crypto is a taxable event depends on what you do with the converted crypto. If you simply trade one type of cryptocurrency for another type of cryptocurrency, then that is considered a taxable event by the IRS and you will need to report it on your taxes. However, if you use cryptocurrency to purchase goods or services or convert it into fiat currency without first trading it for another type of cryptocurrency, then that is not considered a taxable event and you will not need to report it on your taxes.
What are the tax implications of converting cryptocurrency?
The tax implications of converting cryptocurrency depend on a few factors, including the country you reside in, the type of cryptocurrency you’re converting, and the purpose of the conversion.
In general, if you convert cryptocurrency to fiat currency (such as USD), you may be subject to capital gains taxes. However, if you convert cryptocurrency to another form of cryptocurrency, you may not be subject to capital gains taxes (although you may still be subject to other taxes).
It’s important to consult with a tax professional prior to converting any cryptocurrency, as the tax implications can vary depending on your individual circumstances.
What are the tax implications of selling cryptocurrency?
The tax implications of selling cryptocurrency will depend on whether you are selling for profit or losses. If you are selling for profit, then you will be subject to capital gains taxes. If you are selling at a loss, then you may be able to deduct the losses from your other taxable income.
To figure out whether you have a gain or a loss, you will need to calculate your basis in the cryptocurrency. Your basis is generally the cost of acquiring the cryptocurrency, plus any fees or other costs associated with selling it. Once you have your basis, you can calculate your gain or loss by subtracting your basis from the sale price.
If you have a gain, it will be taxed as capital gains income at your marginal tax rate. If you have a loss, it can be deducted from other forms of taxable income on your tax return.
What are the tax implications of buying cryptocurrency?
Cryptocurrency is a digital or virtual currency that uses cryptography for security. 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.
Cryptocurrency is taxed like any other investment in the United States. When you buy cryptocurrency, you have to pay capital gains tax. The tax rate depends on how long you held the cryptocurrency before you sold it. If you held it for less than a year, you will pay short-term capital gains tax. If you held it for longer than a year, you will pay long-term capital gains tax.
What are the tax implications of holding cryptocurrency?
If you hold cryptocurrency as a capital asset, you must treat it as property for tax purposes. This means that any gains or losses from the sale or exchange of cryptocurrency are taxed as capital gains or losses. If you hold cryptocurrency for less than one year before selling or exchanging it, your gains or losses will be short-term capital gains or losses, which are taxed at your ordinary income tax rate. If you hold cryptocurrency for more than one year before selling or exchanging it, your gains or losses will be long-term capital gains or losses, which may be taxed at a lower rate.
The tax implications of converting cryptocurrency to cash are generally the same as the implications of selling cryptocurrency. However, there may be some additional considerations if you convert cryptocurrency to cash and then use the cash to purchase other property, such as goods or services. For example, if you use cash from the sale of cryptocurrency to purchase a car, the car will be considered part of your taxable estate.
If you have questions about the tax implications of holding or converting cryptocurrency, you should speak with a tax professional.
Conclusion
In conclusion, any time you convert one cryptocurrency to another, you may be subject to taxes. This is because the IRS views cryptocurrency as property, and any time you dispose of property (by selling it or exchanging it for something else), you may be subject to capital gains taxes. However, there are some exceptions and loopholes that can be used to minimize or avoid taxes on cryptocurrency conversions, so it’s always best to speak with a tax professional before taking any action.
