Last Updated on May 29, 2023 by Ben
Cryptocurrency is a trending topic in the news lately, so it’s no surprise that people are asking, “how do I pay taxes on cryptocurrency gains?” The answer to this question may be more complicated than you think. Unlike stocks or bonds, crypto was never intended to provide an income stream – rather, their value tends to change based on market forces and sentiment.
What Are Cryptocurrency Tax Rates?
Taxes are hard to understand when it comes to cryptocurrency. Whether you have just started with cryptocurrency or have been involved for a long time, it is important to know about these taxes to stay in compliance and keep the market going.
If you hold crypto for less than a year, your tax rate will be that of short-term gains, which are taxed at the same income bracket as other sources of income. If you own it longer than 12 months and sell it, your cryptocurrency taxes are calculated based on capital gain tax.
The tax rate for cryptocurrency depends on how long you hold the asset. If you held it for no more than one year, then it will be taxed as ordinary income at 10% to 37%.
If you own the asset for longer than one year, then you will pay the long-term capital gains tax rate. It can be from 0% to 20%.
How Do Capital Gains Taxes Work?
Once you figure out how much you have earned with your crypto, they are then classified as either short-term or long-term capital gains.
If you sell a coin after you have held it for less than 12 months, the money from that sale is called a short-term gain. When you earn short-term gains, they are added to your regular income and taxed at your ordinary-income tax bracket. Short-term trading profits include cryptocurrency interest income, mining income, staking income, and airdrops are taxed as ordinary income.
When you sell a coin after holding it for more than 12 months, then you will have a long-term gain.
If you use your computer to collect bitcoins, then the money you make will be taxed. You will pay taxes based on how much money you make and where you live.
When an employer or client pays you in crypto, it’s like they’re paying you in dollars, and you will have to determine the currency’s dollar value on the day you received payment. Your cryptocurrency tax rate will be either your income tax rate or lower capital gains rates, depending on your holding period for that particular type of crypto. You may also need to pay state income taxes as well.
Capital Gains vs. Capital Losses
If you spend or sell your crypto at a loss, you don’t have to pay taxes. If you sell or spend it and make a profit, then you need to pay taxes on those transactions.
If you bought $12,000 in Bitcoin and sold it for $15,000, your taxable gain would be $3,000. But if you traded the same Bitcoin for $9,000, you’d owe nothing in taxes–even though the capital loss of what was spent on buying the Bitcoin could offset other investment gains.
How Much Tax Will You Pay?
In the US, paying taxes on cryptocurrency gains depends on your tax bracket and how long it’s been since you acquired the asset.
Short-term Capital Gains
Any gains or losses made from a cryptocurrency asset held less than 12 months are taxed at a similar rate as your income tax bracket. Any loss can be used to offset income tax up to $3,000 in total, and any further losses can be carried over for next year.
Short-term capital gains are taxed as if they were ordinary income. The money you get from investments for less than a year must be included in your taxes that year.
Ordinary income is taxed at different rates depending on how much you earn. If you get a short-term capital gain, it might be taxed at a higher rate than your regular earnings. This happens when part of your overall income jumps into a higher tax bracket.
Long-term Capital Gains
If you hold a crypto asset for more than one year, there will be a lower tax percentage (0%, 15%, or 20%). You have to pay the lower tax depending on your individual or combined marital income.
Long-term capital gains tax brackets changed as a result of the recent Tax Cuts and Jobs Act (TCJA). Capital gains prior to 2018 were usually taxed at rates associated with income tax brackets. TCJA created specific long-term capital gains taxes, which change yearly.
What Crypto Actions are Taxable Events?
People can buy and use cryptocurrencies to buy things. Bitcoin prices have gone up lately, so that is good. People are buying them more now. Merchants may start to take the money in the future too.
Before you invest in cryptocurrencies, it is important to understand the tax implications. The IRS requires crypto traders to report their gains or losses in their 1040’s and pay according with the income tax bracket they fall into (regular income rates if your holding period is less than a year).
What You Have to Report on Your Tax Return
The IRS classifies cryptocurrencies as a type of property and taxes them like any other type of property. Remember that if you have virtual currency, it will be taxed like any other kind of property, no matter what kind it is.
- You might need to report your gains if you sold or exchanged cryptocurrency or if you used cryptocurrency to buy something.
- If you sold or spent any cryptocurrency that lost value, you can deduct the losses.
- If you want to donate your cryptocurrency, you can do it to a nonprofit. You can get a deduction for this.
- Form 1040 now asks if you have received, sold, sent, or exchanged a virtual currency. If your only transaction was purchasing a virtual currency with real money, then you do not need to answer yes.
To know how much money you will need to report in tax, you need to know the price of your cryptocurrency when you first bought or acquired it. To find this, compare what it was worth when you bought it with what it is worth now. This will tell you how much money to report in taxes.
Do You Have to Pay Taxes on Cryptocurrency Profits?
Crypto exchanges may not send you a tax form. You still need to report your crypto transactions, though. Some exchanges will create reports that you can use when you fill out your taxes. There are also third-party tools that can help you figure out what to put on your taxes.
If you don’t tell the IRS about your cryptocurrency transactions, they may give you a fine. It is also possible that they will put you in prison for up to five years.
Bitcoin might be safe, but it is not always private. The IRS is working with other organizations to find out who has Bitcoin and does not report their gains.
How to Prepare for Crypto Tax Season
Here are some tips to assists you prepare, file, and pay taxes on your cryptocurrency income:
Keep a Record of All Your Crypto Activity
The IRS says you need to keep a record of all the money you have made or lost on your cryptocurrency investments. This includes any money that was given to you as an airdrop if you had an interest in lending and other things. Most exchanges have built-in tax reporting features that will help you do this, but there are also third-party services that will help you keep track of your cryptocurrency transactions.
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Calculate Your Gains and Losses
Once you have your transaction report, you can use a tax calculator or a number of services to work out what you owe. You find the amount by finding the difference between the price you sold and your cost basis (the actual price you paid).
Fill in your Form 8949 and add it to Form Schedule D
The tax Form 8949 is specifically designed for reporting crypto capital gains and losses. To report overall capital gains and losses, use the Schedule D form. The cryptocurrency that you earn as profit needs to go on Schedule 1, and self-employed earnings need to go on Schedule C.
Reporting your cryptocurrency transactions when you file your tax return may seem like something you can put off until the last minute, but it’s best to start tracking them sooner rather than later – especially if you anticipate needing a significant portion of time throughout the year to keep track.
There’s no time to lose to reporting your cryptocurrency transactions. Once you’ve started tracking them, be sure to stay on top of any changes that may occur throughout the year so that you can avoid a big headache at tax time.