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When Do You Pay Taxes on Crypto?
The short answer is: it depends.
The IRS has not issued specific guidance on how to treat cryptocurrencies for tax purposes, so the tax treatment of crypto assets is largely determined by how the assets are being used.
If you’re holding cryptocurrencies as a investment, you’ll generally pay capital gains taxes on any profits when you sell.
If you’re using cryptocurrencies to purchase goods or services, you’ll need to pay taxes
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Introduction
In the United States, the Internal Revenue Service (IRS) treats cryptocurrency as property for tax purposes. This means that if you buy, hold, or sell cryptocurrency, you may have to pay taxes on your gains.
Cryptocurrency is a type of virtual currency that uses cryptography to secure its transactions and to control the creation of new units. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control.
If you profit from cryptocurrency through buying, selling, or mining, you may have to pay taxes on your earnings. The amount of tax you owe depends on how long you held the cryptocurrency, what type of income it is (capital gains or ordinary income), and how much money you made.
To calculate your capital gains tax, you will need to know the purchase price (also called the cost basis) and the sale price of each cryptocurrency transaction. If you don’t have records of your purchase prices, you can use a service like CoinTracking.info to help you determine your cost basis.
If you hold cryptocurrency for less than a year before selling it, your gains will be taxed as ordinary income at your marginal tax rate. For example, if you are in the 25% tax bracket and sell cryptocurrency for a $1000 profit, you will owe $250 in taxes on your earnings.
If you hold cryptocurrency for more than a year before selling it, your gains will be taxed at the long-term capital gains tax rate, which is lower than the marginal tax rate. For example, if you are in the 25% tax bracket and sell cryptocurrency for a $1000 profit after holding it for two years, you will owe $150 in taxes on your earnings (15% of $1000).
What is cryptocurrency?
Cryptocurrency is a digital or virtual currency 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.
How is cryptocurrency taxed?
Cryptocurrency is taxed like any other investment in the US. Short-term gains (trades that are held for less than a year) are taxed as ordinary income at your marginal tax rate. Long-term gains (trades held for more than a year) are taxed at a lower rate, usually 15 or 20 percent, depending on your tax bracket.
You’ll also need to pay capital gains tax on any cryptocurrency you sell for a profit. The tax rate is the same as your marginal tax rate. So, if you’re in the 25% tax bracket, you’ll owe 25% capital gains tax on your crypto profits.
If you’re not sure what your marginal tax rate is, you can use this calculator from the Tax Foundation to estimate it.
When do you pay taxes on cryptocurrency?
Cryptocurrencies are subject to capital gains taxes in the US, as well as other countries. This means that if you buy cryptocurrency and then sell it at a higher price, you will need to pay taxes on the difference.
The amount of tax you owe will depend on how long you held the cryptocurrency, as well as what tax bracket you are in. For example, long-term capital gains are taxed at a lower rate than short-term gains.
If you hold cryptocurrency for less than a year before selling it, you will owe short-term capital gains taxes. These taxes are calculated at your marginal tax rate, which is the rate you pay on your last dollar of income. For most people, this is between 10% and 37%.
If you hold cryptocurrency for more than a year before selling it, you will owe long-term capital gains taxes. These taxes are often lower than short-term capital gains taxes, and they max out at 20%.
You may also owe state taxes on your cryptocurrency profits. Currently, only a handful of states have clarified their stance on crypto taxes. However, it’s likely that more states will start to impose taxes as cryptocurrency becomes more mainstream.
What if you don’t pay taxes on cryptocurrency?
If you don’t pay taxes on cryptocurrency, you may be subject to a number of penalties. The first is that you may be charged interest on the unpaid tax. The second is that you may be fined for not paying your taxes. The third is that the IRS may take legal action against you, which could include seizing your assets or putting a lien on your property.
Conclusion
Assuming you’ve made a profit from buying and selling cryptocurrency, you’ll need to know how and when to pay taxes on your crypto activities.
In the United States, the IRS treats cryptocurrency as property for tax purposes, which means you’ll need to pay capital gains tax on any profits you make from buying and selling crypto.
The tax rate you’ll pay on your crypto profits depends on how long you held the cryptocurrency before selling it – short-term gains are taxed at your marginal tax rate, while long-term gains are taxed at a lower rate.
You’ll also need to pay self-employment tax if you mined cryptocurrency or earned income from providing services in exchange for crypto.
Generally, you’ll need to report your crypto activities on your annual tax return. However, if you’ve made a large profit from trading crypto, you may be required to file a quarterly estimated tax return.
If you’re not sure how to report your crypto taxes, we recommend speaking with a tax professional who can help ensure you stay compliant with the IRS.
