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How Does Crypto Tax Work? If you’re new to the crypto world, you may be wondering how taxes work for Bitcoin and other digital currencies.
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Introduction
Cryptocurrency is taxed like any other investment in the US. When you sell cryptocurrency for more than you paid for it, you have to pay capital gains tax. The amount of tax you owe depends on how long you held the cryptocurrency, your tax bracket, and whether this is a short-term or long-term gain.
If you hold cryptocurrency for less than a year before selling it, you will pay short-term capital gains tax. This is taxed as ordinary income at your marginal tax rate. For example, if you are in the 25% tax bracket, you will owe 25% in taxes on your gains.
If you hold cryptocurrency for more than a year before selling it, you will pay long-term capital gains tax. This is taxed at a lower rate than short-term capital gains tax – 15% for most people.
You only owe taxes on the gain – that is, the difference between what you paid for the cryptocurrency and what you sold it for. If you sold cryptocurrency for less than what you paid for it, you can deduct your losses from other capital gains or up to $3,000 from your ordinary income.
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.
What is a taxable event?
In the United States, when you make a profit from selling cryptocurrency, it is considered a taxable event. That means if you bought one bitcoin for $5,000 and sold it later for $8,000, you would owe tax on your $3,000 profit. The IRS considers cryptocurrency to be property for tax purposes, which means capital gains taxes apply.
There are two types of capital gains taxes in the US: long-term and short-term. Long-term capital gains are taxed at a lower rate than short-term capital gains. In order to qualify for long-term capital gains treatment, you must hold the asset for more than one year before selling it. If you hold it for one year or less, it is considered a short-term gain and is taxed at your ordinary income tax rate.
When you sell cryptocurrency, you will need to calculate your gain or loss and report that on your taxes. You can do this by subtracting your cost basis (what you paid for the crypto) from the sale price. If your cost basis is higher than the sale price, you have a realized loss and can use that to offset other capital gains or up to $3,000 of ordinary income. If your cost basis is lower than the sale price, you have a realized gain and will need to pay capital gains taxes on that amount.
What are the capital gains tax rates?
Your capital gains tax rate depends on your income. For most people, it will be either 0%, 15%, or 20%.
If you have a taxable income of $78,750 or less, you’ll pay a capital gains tax rate of 0%. If your taxable income is between $78,750 and $488,850, you’ll pay a rate of 15%. If it’s above that amount, you’ll pay 20%.
These rates only apply to long-term capital gains—gains on assets you held for more than a year. Short-term capital gains, on assets held for a year or less, are taxed at your regular income tax rate.
How do I calculate my gains?
There are a few different methods you can use to calculate your gains, but the most important thing is to be consistent. The most common method is called First In First Out (FIFO), which means you calculate your gains using the price of the first coin you bought as the “original” price, and the price of the last coin you sold as the “final” price.
Another method is called Last In First Out (LIFO), which means you use the price of the last coin you bought as your original price, and the price of the first coin you sold as your final price.
Finally, there is a method called Highest In First Out (HIFO), which means you use the highest price of any coin you bought as your original price, and the lowest price of any coin you sold as your final price.
calculating your gains can be complicated, so it’s important to speak with a tax professional if you have any questions.
How do I report my gains?
There are a few different ways to report your gains, depending on how you file your taxes. If you file electronically, you can submit your information directly to the IRS. Otherwise, you can file a Form 8949 with your paper return.
The most important thing is to be accurate and upfront about your gains. Remember, the IRS is cracking down on crypto tax evaders, so it’s not worth it to try to hide anything. Be sure to keep good records of all your trades so that you can easily calculate your gains (or losses) come tax time.
Looking for more information on how crypto taxes work? Check out our complete guide!
What if I don’t pay my taxes?
If you don’t pay your taxes, you could face some serious consequences. The IRS could come after you for the money you owe, and they could even put a lien on your property or garnish your wages. You could also be fined or jailed for tax evasion. So it’s definitely in your best interest to pay what you owe.
Resources
When it comes to cryptocurrency taxes, there are a few different things you need to be aware of. First, it’s important to know that the IRS considers virtual currency to be property, not currency. This means that any gains or losses from selling or trading cryptocurrency are subject to capital gains tax.
In addition, if you’re paid in cryptocurrency for goods or services, those earnings are considered taxable income. And if you mine virtual currency, that is also considered taxable income.
So how do you go about calculating your crypto taxes? There are a few different resources you can use.
First, you can use a site like CoinTracker or BitcoinTaxes to calculate your gains and losses from trading or selling cryptocurrency. These sites will also help you calculate your taxable income if you’ve been paid in crypto.
Second, you can use the IRS’s Form 8949 to report your capital gains and losses from selling or trading crypto. This form must be included with your annual tax return.
And finally, if you’re mined crypto, the IRS considers that income just like any other income from a business venture. You’ll need to report it on your tax return using Schedule C (for sole proprietorships) or Form 1120 (for corporations).
