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If you’re thinking about investing in cryptocurrency, you may be wondering about the tax implications. Here’s a quick overview of how much crypto tax you may be liable for.
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Introduction
At its simplest, cryptocurrency tax is the process ofLevying taxes on profits gained from buying, selling, or trading cryptocurrencies. In the United States, the Internal Revenue Service (IRS) has issued guidance on how it intends to treat cryptocurrency for tax purposes. In short, the IRS considers cryptocurrency to be property, and any gains or losses from buying, selling, or trading it are subject to capital gains tax.
There are a few important things to keep in mind when it comes to crypto tax. First, you only owe taxes on profits; if you buy cryptocurrency and hold it without selling it, you don’t owe any taxes. Second, you only owe taxes on realized gains; if you buy cryptocurrency and then sell it for more than you paid, you owe capital gains tax on the difference. Finally, because crypto is considered property for tax purposes, you can also deduct any losses you incur from buying, selling, or trading it.
The amount of tax you owe depends on your marginal tax rate; in the United States, this ranges from 10% to 37%. The exact amount you owe also depends on how long you held the cryptocurrency before selling it; if you held it for a year or less, your gains are taxed as short-term capital gains, while if you held it for more than a year they’re taxed as long-term capital gains. Short-term capital gains are taxed at your marginal tax rate, while long-term capital gains are taxed at a lower rate of 15% or 20%, depending on your marginal tax rate.
Cryptocurrency taxes can be complicated, and there’s a lot of room for error. If you’re not sure how to file your crypto taxes or want to avoid mistakes that could result in an audit by the IRS, we recommend working with a qualified accountant or tax professional who specializes in cryptocurrency taxation.
What is a cryptocurrency?
A cryptocurrency is a digital or virtual asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency. 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. Cryptocurrencies are often traded on decentralized exchanges and can also be used to purchase goods and services.
How is cryptocurrency taxed?
Cryptocurrency is taxed like any other investment in the US. Short-term gains (an investment held for less than a year) are taxed as ordinary income at your marginal tax rate. Long-term gains (an investment held for more than a year) are taxed at a lower rate, typically 15–20%.
The first step in calculating your cryptocurrency taxes is to calculate your realized gains or losses. This is the difference between the price you paid for an asset and the price you sold it for. If you sold an asset for a higher price than you paid, you have a realized gain; if you sold it for a lower price, you have a realized loss.
Your realized gains and losses are totaled up and reported on your tax return. If you have more realized gains than losses, you will owe taxes on the net amount. If you have more losses than gains, you may be able to reduce your taxable income by up to $3,000 per year ($1,500 if you’re married and filing separately).
It’s important to note that cryptocurrency is not treated like stock by the IRS. Gains and losses are treated as capital gains and losses, which have different tax rates than ordinary income.
What are the tax implications of cryptocurrency?
Cryptocurrency is a digital or virtual asset that uses cryptography to secure its transactions and to control the creation of new units. 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.
Cryptocurrency is taxed as property. Transactions using cryptocurrency are subject to capital gains tax. When you sell cryptocurrency for cash, you will realized a capital gain or loss. This gain or loss is taxed as ordinary income at your marginal tax rate.
What are the tax rates for cryptocurrency?
The IRS treats cryptocurrency as property for tax purposes. This means that you’re subject to capital gains tax on any profits you make from selling or trading cryptocurrency. The long-term capital gains tax rates are 0%, 15% or 20% depending on your tax bracket.
Short-term capital gains are taxed at your ordinary income tax rate. If you hold your crypto for less than a year before selling, it’s considered a short-term gain and taxed as such.
In addition to capital gains taxes, you may also have to pay self-employment taxes if you earn cryptocurrency through mining or other means. Self-employment taxes are currently set at 15.3%.
How can I reduce my cryptocurrency taxes?
While there are currently no specific guidelines for cryptocurrency taxes, the IRS has said that virtual currency should be treated as property for tax purposes. This means that any gains or losses from selling or trading cryptocurrency would be subject to capital gains tax.
However, there are a few ways that you can reduce your tax liability when it comes to cryptocurrencies:
-Invest for the long term: If you hold onto your cryptocurrency for more than a year before selling it, you will be subject to long-term capital gains tax, which is lower than the short-term rate.
-Use a cryptocurrency exchange: If you use a reputable and regulated exchange, such as Coinbase or Gemini, you may be able to take advantage of certain tax breaks, such as the wash sale rule.
-Track your losses: If you do have any losing trades, make sure to keep track of them so you can offset your gains when it comes time to file your taxes.
Conclusion
Based on the information we gathered from the IRS, it looks like crypto taxes are due when you sell, trade, or use your cryptocurrency for goods and services. Short-term capital gains are taxed as regular income, while long-term capital gains are taxed at a lower rate. If you’re mining cryptocurrency, you’ll likely have to pay self-employment tax.
Of course, everyone’s situation is different, so it’s important to speak with a tax professional to figure out exactly what you owe. But now that you have a general understanding of how crypto taxes work, you can start planning and budgeting for them accordingly.
