How Do You Pay Tax on Crypto?

It’s no secret that cryptocurrency is gaining popularity as a investment and payment method. But how do you pay tax on your crypto earnings?

Checkout this video:

Introduction

Cryptocurrency, also known as digital or virtual currency, is a type of money that is not regulated by any government or financial institution. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Cryptocurrencies are bought and sold on decentralized exchanges and can be used to purchase goods and services.

Cryptocurrencies are taxed like other investment income. If you sell cryptocurrency for more than you paid for it, you will owe capital gains tax. Short-term capital gains are taxed at your marginal tax rate, which can be as high as 37%, while long-term capital gains are taxed at a lower rate: either 0%, 15%, or 20%, depending on your tax bracket.

To calculate your capital gains, you will need to know the following:
-The date you purchased the cryptocurrency
-The price you paid per unit (in USD)
-The date you sold the cryptocurrency
-The price you sold it for per unit (in USD)

If you have lost money on your cryptocurrency investment, you may be able to deduct your losses on your taxes. Capital losses can be used to offset capital gains, as well as up to $3,000 of other income.

What is cryptocurrency?

Cryptocurrency is a digital or virtual asset that uses cryptography for security. Cryptocurrencies are decentralized, which means they are 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.

What is a taxable event?

In the United States, the IRS views cryptocurrencies as property, not currency. This has major implications for taxes.

Here’s what you need to know.

What is a taxable event?
A taxable event is a situation where you realize a capital gain or loss from buying, selling, or exchanging cryptocurrency.

If you buy crypto and then later sell it at a higher price, you have realized a capital gain and may be liable for taxes on that gain. Similarly, if you sell crypto at a lower price than you bought it, you have realized a capital gain and may be able to deduct that loss on your taxes.

There are other situations where you may be liable for taxes on your cryptocurrency holdings as well. For example, if you exchange one cryptocurrency for another (like exchanging Bitcoin for Ethereum), that is also considered a taxable event.

In short, any time you buy, sell, or exchange cryptocurrency, it’s important to keep track of those transactions and understand the tax implications.

How do you pay tax on cryptocurrency?

Cryptocurrencies are treated as property by the IRS, so you’ll need to pay taxes on any gains you realize when you sell them. Short-term gains are taxed as ordinary income, at your marginal tax rate. Long-term gains, if you hold the asset for more than a year, are taxed at the lower capital gains rate.

If you day trade cryptocurrency, or buy and sell on an exchange frequently, you may incur short-term capital gains or losses that need to be reported come tax time. The same is true if you use cryptocurrency to pay for goods or services—the recipient will likely have to pay taxes on the income, and you may have to pay taxes on the capital gain.

Calculating your gain or loss can be complicated depending on how you acquired the cryptocurrency, how long you held it, what you used it for and when you sold it. You may need to use a specific cryptocurrency tax software to help calculate your taxes owed. Talk to a tax professional if you have questions about crypto and taxes.

What if you don’t pay tax on cryptocurrency?

If you fail to pay tax on cryptocurrency, the IRS may choose to audit you. This could result in fines, penalties, and even jail time. To avoid these penalties, it’s important to understand the tax laws surrounding cryptocurrency.

If you’re not sure how to pay tax on cryptocurrency, there are a few things you can do. First, talk to an accountant or tax advisor. They can help you determine how much tax you owe on your cryptocurrency earnings.

Second, keep track of your cryptocurrency transactions. This will help you determine how much tax you owe on your gains. Finally, report your cryptocurrency earnings on your tax return. This will ensure that you don’t face any penalties for failing to pay tax on your gains.

Conclusion

If you’ve made money trading cryptocurrency, you may be wondering how you can go about paying taxes on your earnings. The good news is that, in most cases, you can simply report your gains and losses on your annual tax return.

However, there are a few things to keep in mind. First, if you’ve made a large profit, you may be subject to capital gains taxes. Second, if you’ve been trading frequently, you may need to pay self-employment taxes.

Fortunately, there are plenty of resources available to help you figure out how to pay taxes on crypto. The IRS has published guidance on the matter, and there are numerous online calculators that can help you estimate your tax liability. So don’t be afraid to do some research and talk to a tax professional if necessary—paying taxes on cryptocurrency doesn’t have to be difficult or stressful.

Scroll to Top