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When Do You Have to Pay Taxes on Crypto? – The Answer May Surprise You!
If you’re like most people, you probably think that cryptocurrency is completely untaxed. However, the reality is that there are a few scenarios in which you may be required to pay taxes on your earnings.
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Introduction
The IRS has been treating cryptocurrency as property for tax purposes since 2014. That means if you buy, sell, mine or exchange cryptocurrency, you have to pay taxes on it. Here’s what you need to know about cryptocurrency and taxes.
Cryptocurrency is property
The IRS taxes cryptocurrency as property, which means you have to pay capital gains tax when you sell it. If you hold your crypto for less than a year before selling it, you’ll pay short-term capital gains tax, which is taxed at your ordinary income tax rate. If you hold your crypto for more than a year before selling it, you’ll pay long-term capital gains tax, which is currently taxed at a lower rate of 20%.
You have to report your crypto transactions
You have to report every crypto transaction on your taxes. That means if you buy crypto, sell crypto or use it to pay for goods or services, you have to keep track of it and report it on your taxes. The IRS requires that all cryptocurrency transactions be reported on Form 8949, Sales and Other Dispositions of Capital Assets.
You might owe self-employment tax on mining income
If you earn income from mining cryptocurrency, you might owe self-employment tax. Self-employment tax is a Social Security and Medicare tax for people who are self-employed or who own a small business. The current self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare).
What is cryptocurrency?
Cryptocurrency is a digital or virtual asset that uses cryptography for security. 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 or services.
What are the tax implications of cryptocurrency?
The IRS treats cryptocurrency as property for tax purposes, which means you need to pay taxes on any gains made from buying and selling it. If you hold crypto for more than a year before selling, you may be eligible for long-term capital gains, which are taxed at a lower rate than short-term gains.
There are a few other key things to keep in mind when it comes to crypto taxes:
-You’re only taxed on the gains made from buying and selling crypto – not on the purchase price itself. So if you buy 1 Bitcoin (BTC) for $10,000 and then sell it later for $11,000, you only need to pay taxes on the $1,000 in profit.
-If you use cryptocurrency to purchase goods or services, you may need to pay taxes on the transaction. This is typically treated as a regular income tax transaction.
-If you mine cryptocurrency, you may need to pay taxes on the income you receive from mining operations.
When do you have to pay taxes on cryptocurrency?
The simple answer is: whenever you sell, trade, or otherwise dispose of your crypto, you may owe taxes. This is true whether you’re cashing out to fiat currency or another cryptocurrency.
Here are a few key things to keep in mind:
-Cryptocurrency is treated as property for tax purposes, so you may owe capital gains taxes when you dispose of it.
-How much tax you owe depends on how long you held the crypto, as well as your marginal tax rate.
-There are some exceptions and special cases to be aware of, such as if you use crypto for gifting or payments.
In general, you’ll want to keep track of all your crypto purchases and sales so that you can accurately calculate your gains and losses come tax time.
How to pay taxes on cryptocurrency?
There are a few things to keep in mind when it comes to paying taxes on cryptocurrency. For one, crypto is considered an asset for tax purposes, which means you could owe capital gains taxes if you sell it for more than you paid. You may also owe self-employment tax if you mine crypto or receive it as payment for goods or services.
While the IRS has yet to issue clear guidance on how to handle crypto taxes, there are a few things you can do to make sure you’re compliant. First, keep detailed records of all your crypto transactions. This includes the date, time, value and type of each transaction. You’ll need this information to calculate your capital gains or losses when it comes time to file your taxes.
Second, consider using a tax software that can help you automate the process of tracking your crypto transactions and calculating your gains or losses. This can save you a lot of time and hassle come tax season.
Finally, remember that paying taxes on cryptocurrency is your responsibility as a law-abiding citizen. So make sure you do your research and talk to a tax professional if you have any questions about how to file your taxes on crypto earnings.
What are the tax rates for cryptocurrency?
The tax rate for cryptocurrency is the same as the capital gains tax rate. For most people, that’s 15%. However, if you are in a higher tax bracket, it could be as high as 20%.
What are the penalties for not paying taxes on cryptocurrency?
The IRS treats cryptocurrency as property for tax purposes. That means if you’ve bought, sold, or traded cryptocurrency, you may owe taxes on your gains. And if you don’t pay, you could face penalties and interest.
If you fail to pay your taxes, the IRS can impose a variety of penalties, including:
-A late payment penalty of 0.5% of the unpaid taxes for each month or part of a month that the taxes are not paid
-A failure-to-pay penalty of 5% of the unpaid taxes
-Interest on the unpaid taxes
Conclusion
The bottom line is that you need to pay taxes on crypto no matter what. whether you’re cashing out to fiat or using it to pay for goods and services, the IRS classifies cryptocurrency as property, which is subject to capital gains taxes. So make sure you keep track of all your crypto transactions and report them come tax time.
