If you’re like most people, you’re probably wondering how much tax you’ll have to pay on your crypto gains. Luckily, we’ve got you covered. In this blog post, we’ll break down everything you need to know about paying taxes on crypto gains.
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When it comes to taxes, there are a lot of gray areas with cryptocurrency. The IRS has yet to give clear guidance on how to handle crypto taxes, and as a result, many people are unsure of how to properly report their gains.
In this article, we’ll attempt to clear up some of the confusion by explaining how capital gains tax works and how it applies to cryptocurrency.
What is a capital gains tax?
A capital gains tax is a tax applied to the profits you make when you sell an asset for more than you paid for it. For crypto, this means if you buy a coin for $1 and sell it later for $10, you would pay a capital gains tax on the $9 profit.
The amount of tax you pay depends on your country’s laws and your personal tax situation. In the US, capital gains taxes are based on your income bracket: if you’re in the 10% or 12% bracket, you’ll pay 0%, while if you’re in the 22% bracket, you’ll pay 15%.
If you’re not sure what bracket you’re in, you can use this tool from TurboTax to calculate your marginal tax rate.
How is crypto taxed?
When it comes to Bitcoin and other digital assets, you may be wondering how they are taxed. For the most part, crypto is taxed as property. This means that if you sell crypto, you may have to pay capital gains tax. The tax rate will depend on how long you held the crypto and what your marginal tax rate is. Let’s take a closer look.
Short-term capital gains
Short-term capital gains occur when you sell a cryptocurrency for fiat currency (USD, EUR, GBP etc.) or another cryptocurrency that you held for less than a year. Short-term gains are taxed at your normal income tax rate. For example, let’s say you bought Bitcoin for $10,000 and it’s now worth $15,000. You cash out by selling your Bitcoin for $15,000 and then you have a short-term capital gain of $5,000.
If you are in the 25% tax bracket, you would owe $1,250 in taxes on your short-term capital gain. To calculate this, simply take 25% of $5,000 which equals $1,250.
Of course, since cryptocurrencies fluctuate in value so much, it’s possible to have a short-term capital loss as well. If this happens, you can use your losses to offset other capital gains (more on this later). You can also carry your losses forward to future years.
Long-term capital gains
If you hold your cryptocurrency for more than a year before selling, you will be taxed at the long-term capital gains rate, which is lower than the rate for short-term capital gains. The long-term capital gains tax rates are 0%, 15% or 20%, depending on your tax bracket.
How to calculate your crypto taxes
Short-term capital gains
Short-term capital gains taxes on cryptocurrency are calculated the same way as your regular income taxes. If you fall into the 10-15% tax bracket, you will owe 10-15% of your realized gains in taxes. For example, if you made $1,000 from trading cryptocurrency in a year, and you fall into the 12% tax bracket, you will owe $120 in taxes on your crypto gains for the year.
Long-term capital gains taxes on cryptocurrency are a bit more complicated. Long-term capital gains are taxed at a lower rate than your income, and the exact rate depends on what tax bracket you falls into. For example, if you are in the 15% tax bracket, you will owe only 15% in long-term capital gains taxes. However, if you are in the 20% tax bracket, you will owe 20% in long-term capital gains taxes.
The reason long-term capital gains rates are lower is because they are considered to be inflationary. That is, when you hold an asset for a long time, it is likely that the price of the asset will go up due to inflation. Therefore, the government gives a discount on long-term capital gains to encourage people to invest for the long term.
Long-term capital gains
If you’ve held onto your crypto for more than a year before selling it, you may be eligible for the long-term capital gains tax rate, which is lower than the short-term rate. For most people, the long-term rate is 15 percent, but it can be as high as 20 percent if you’re in a higher tax bracket.
Based on the information we’ve gathered, it seems that crypto gains are taxable in most countries. However, the tax rates vary significantly from country to country, so it’s important to do your own research to figure out how much tax you’ll need to pay on your gains.
In general, it seems like most countries treat crypto gains as capital gains, so the tax rate is usually lower than the rate for regular income. However, there are a few exceptions, so again, it’s important to do your own research to make sure you’re correctly calculating your taxes.
If you have any further questions about how to calculate your taxes on crypto gains, we recommend speaking to a tax specialist in your country.