How Much Does Crypto Get taxed?

Wondering how much you’ll be taxed on your crypto earnings? Check out our blog post to find out!

Checkout this video:

httpv://youtu.be/https://www.youtube.com/shorts/wKK0ENrCzIU

Introduction

Cryptocurrencies are taxed in a similar way to other investments. Any gains you make from selling your crypto are subject to capital gains tax, and you may also have to pay tax on any dividends you receive.

The amount of tax you owe will depend on your tax bracket and the amount of time you held the crypto for. If you held the crypto for less than a year, you will be taxed at your ordinary income tax rate. If you held the crypto for more than a year, you will be taxed at the long-term capital gains tax rate, which is lower than the ordinary income tax rate.

You may also owe self-employment tax if you mined crypto or received it as payment for goods or services. This is because mining and selling crypto are considered business activities.

Finally, if you use crypto to purchase goods or services, you may owe sales tax. This is because buying goods with crypto is considered a barter transaction, and barter transactions are subject to sales tax in most jurisdictions.

What is a 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 blend of alternative coin.

Bitcoin and its derivatives use decentralized control as opposed to centralized digital currency and central banking systems. The decentralized control of each cryptocurrency works through a blockchain, which is a public transaction database, functioning as a distributed ledger.

What is a taxable event?

A taxable event is any activity that results in a tax liability. The most common taxable events are selling merchandise, providing services, and earning income. However, there are many other activities that can trigger a tax liability, such as gambling, investing, and winning the lottery.

In the case of cryptocurrency, a taxable event is any transaction that results in a capital gain or loss. This includes buying, selling, exchanging, or spending crypto. It also includes converting crypto to fiat currency (e.g., dollars or euros), or exchanging one type of crypto for another (e.g., Bitcoin for Ethereum).

How are cryptocurrency gains taxed?

Short-term gains are taxed as ordinary income at your marginal tax rate. Long-term gains are taxed at a lower rate, as low as 0% for those in the 10% and 15% marginal tax brackets. The tax rate on long-term gains is 20% for those in the 25%, 28%, 33%, and 35% marginal tax brackets, and it’s 15% for those in the highest marginal tax bracket, 37%.

Here’s an example to illustrate how this works. Let’s say you bought one bitcoin for $10,000 and sold it one year later for $12,000. You would have a short-term gain of $2,000, which would be taxed at your marginal tax rate. If your marginal tax rate is 25%, you would owe $500 in taxes on your $2,000 gain.

Now let’s say you held on to your bitcoin for two years before selling it. In this case, you would have a long-term gain of $2,000 that would be taxed at a lower rate. If you’re in the 10% or 15% marginal tax bracket, your long-term capital gains tax rate is 0%. If you’re in the 25%, 28%, 33%, or 35% bracket, your long-term capital gains tax rate is 15%. And if you’re in the highest marginal tax bracket (37%), your long-term capital gains tax rate is 20%.

What if I lose money on my cryptocurrency investment?

Cryptocurrencies are taxed like any other investment in the US. If you make money on your investment, you will owe taxes on your gains. If you lose money on your investment, you may be able to deduct your loss from other income on your tax return.

The Internal Revenue Service (IRS) has not yet issued guidance on how to treat cryptocurrency for tax purposes, but we expect that they will treat it as an asset for capital gains purposes. This means that if you buy a cryptocurrency and then sell it at a higher price, you will owe taxes on your gain. If you sell your cryptocurrency for less than you paid for it, you may be able to deduct your loss from other income on your tax return.

We recommend talking to a tax professional if you have questions about how cryptocurrencies will be taxed.

What about other cryptocurrencies?

What about other cryptocurrencies?
While Bitcoin remains the most well-known cryptocurrency, there are many other types of digital currencies available. These include Ethereum, Litecoin, Monero and Zcash. As with Bitcoin, profits from trading or investing in other digital currencies are subject to capital gains tax.

What if I’m paid in cryptocurrency?

If you are paid in cryptocurrency, you will be treated as if you were paid in cash for tax purposes. This means that you will be taxed on the fair market value of the cryptocurrency at the time you receive it. For example, if you are paid 1 bitcoin (BTC) worth $5,000 for a consulting job, you will be treated as having received $5,000 in cash for tax purposes. You will need to report this income on your tax return and pay any applicable taxes.

What if I’m mining cryptocurrency?

Mining cryptocurrency works a little differently than earning it through regular means. When you mine cryptocurrency, you are rewarded with newly minted coins as well as a transaction fee from the person who sent the funds.

In most cases, the transaction fee is worth more than the newly mined coins. This is because mining requires a lot of computer power, which can be expensive. When you file your taxes, you will need to report any income from mining as well as any expenses related to your mining operation.

What if I’m using cryptocurrency to pay for goods or services?

If you are using cryptocurrency to pay for goods or services, the transaction is treated as a barter transaction. That means you’ll need to calculate the fair market value of the goods or services in Canadian dollars when you report it on your tax return.

What do I need to do come tax time?

At tax time, you will need to report any gains or losses from your crypto transactions. This will include any gains or losses from buying, selling, trading, or using crypto to make a purchase.

If you made any profits from your crypto activities, you will need to pay capital gains taxes on those profits. The tax rate you will pay depends on your income and tax bracket.

If you had any losses, you may be able to deduct those losses on your tax return. This can help offset any gains you made and lower your overall tax bill.

You will also need to report any income you received in the form of crypto, such as interest from lending or staking activities. This income will be taxed at your marginal tax rate.

Crypto taxes can be complicated, so it’s important to keep good records of all your transactions and consult with a tax professional if needed.

Conclusion

Assuming that you are in the United States, the answer to this question depends on a few factors. The first is whether or not you are considered to be a “day trader.” If you are, then your gains and losses will be treated as ordinary income and taxed accordingly. If you are not a day trader, then your gains and losses will be treated as capital gains and losses, and taxed at a lower rate.

Another factor that comes into play is how long you held the cryptocurrency before selling it. If you held it for less than a year, then your gains will be considered short-term capital gains and taxed at your ordinary income tax rate. If you held it for longer than a year, then your gains will be considered long-term capital gains and taxed at a lower rate.

So, to answer the question definitively, we would need to know more about your personal circumstances. However, in general, crypto is taxed as either ordinary income or capital gains, depending on whether or not you are considered a day trader and how long you held the crypto before selling it.