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If you’re wondering how much taxes you’ll have to pay on your crypto earnings, the answer depends on a few factors. In this blog post, we’ll break down everything you need to know about crypto taxes so you can be prepared come tax season.
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Introduction
Cryptocurrency is a digital or virtual asset that uses cryptography for security. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.
Bitcoin, first released as open-source software in 2009, is the first decentralized cryptocurrency. Since the release of bitcoin, over 4,000 altcoins (alternative variants of bitcoin, or other cryptocurrencies) have been created.
In 2018, the total market capitalization for all cryptocurrencies was over $800 billion and has since fallen to around $250 billion.
Cryptocurrencies are taxed in a similar way to other investment assets. You will need to pay capital gains tax on any profit you make from selling them. If you hold onto your cryptocurrencies for more than 12 months, you may be eligible for a discount on your capital gains tax.
In general, you will need to pay tax on any profit you make from selling cryptocurrency, regardless of how long you held onto it. However, if you held onto your cryptocurrency for more than 12 months before selling it, you may be eligible for a 50% discount on your capital gains tax.
How Are Taxes Calculated on Crypto Gains?
Cryptocurrencies are taxed at the special capital gains rate if you held the investment for over a year. For example, if you bought Bitcoin for $8,000 and sold it a year later for $10,000, you would only owe taxes on the $2,000 in gains. The long-term capital gains tax rate is lower than the ordinary income tax rate, which is why it’s important to hold onto your crypto investments for at least a year before selling.
If you sell your crypto before a year has passed, you’ll be taxed at the ordinary income tax rate, which ranges from 10% to 37% depending on your tax bracket. So, if you’re in the 22% tax bracket and you sell Bitcoin that you bought for $8,000 after six months, you would owe 22% of the $2,000 in gains, or $440.
It’s also important to note that crypto to crypto trades are taxable events. So if you exchange your Bitcoin for Ethereum, you would owe taxes on any gains from the Bitcoin.
What if I Didn’t Pay Taxes on My Crypto Gains?
It’s important to understand the implications of not paying taxes on your crypto gains. Depending on the size of your gains, you may be subject to different penalties. For example, if you owe more than $10,000 in taxes, you may be subject to a felony charge and up to 5 years in prison. In addition, you will also be responsible for paying interest and any late fees associated with your unpaid taxes.
How Can I Reduce the Amount of Taxes I Owe on Crypto?
The amount of taxes you owe on your crypto will depend on a few different factors, including how much money you made and what country you live in. In general, though, there are a few things you can do to reduce the amount of taxes you owe.
If you live in the United States, for example, you can take advantage of the wash sale rule. This rule allows you to sell your crypto for a loss and then buy it back within 30 days without having to pay any taxes on the sale. This can be a great way to reduce your tax bill if you plan on selling your crypto in the near future.
You can also take advantage of capital gains tax laws in many countries. These laws allow you to sell your crypto for a profit and then only pay taxes on the portion of the profit that is above a certain threshold. This threshold is different in every country, so be sure to check with your tax advisor to see if it applies to you.
In general, though, there are a few things you can do to reduce the amount of taxes you owe on your crypto. By taking advantage of the wash sale rule and capital gains tax laws, you can significantly reduce your tax bill.
Conclusion
Based on the information we gathered, it seems that there are a variety of tax implications when it comes to cryptocurrency. It is important to note that tax laws are constantly changing, so it’s important to stay up-to-date on the latest information.
If you’re not sure how to file your taxes on cryptocurrency, we recommend speaking with a certified accountant or tax professional.
