How is Crypto Taxed?

In the US, cryptocurrency is seen as a digital asset, and the IRS treats it the same way it treats stocks, bonds, and other financial assets. Like with these assets, the money you make is taxed at various rates depending on how you acquired your cryptocurrency and how long you hold it. 

The Internal Revenue Service (IRS) in the United States taxes cryptocurrency as property. This means that cryptocurrency purchases, holdings, and sales are subject to capital gains tax.

If you buy a cryptocurrency and sell it for a higher price than you paid for it, you will have a capital gain and will be taxed on that gain. Similarly, if you sell cryptocurrency for less than what you paid for it, you will incur a capital loss, which may be deducted from your taxable income.

The IRS requires cryptographic transactions to be reported on your tax return, and failure to do so can result in fines and penalties.

In this article, you will learn how the IRS taxes crypto when your cryptocurrency is taxed, and how your actions may affect your taxes.

How is Crypto Taxed?

Both federal and state (where applicable) impose capital gains taxes on cryptocurrency. They might be long-term or short-term capital gains.

Long-term capital gains tax is a tax on earnings from the sale of an asset held for more than a year. Depending on your filing status and taxable income, the long-term capital gains tax rate ranges from 0% to 15% to 20%. They often have lower tax rates than short-term capital gains.

Short-term capital gains are gains from selling assets you’ve owned for a year or less, and they are usually taxed at the same rate as your ordinary income, ranging from 10% to 37%.

The tax you will ultimately owe depends on how long you hold your cryptocurrency. You will eventually pay less if you sell your cryptocurrency straight away than if you held onto it for more than a year.

How do I know I owe crypto taxes?

At this point, it would interest you to know that not all crypto transactions are taxable. To adequately explain this, we have highlighted those activities that are not taxed as “Not taxable crypto transactions” and those that are under “taxable crypto transactions.”

Not taxable Crypto Transactions 

Buying (with cash) and Holding Cryptocurrency

Buying and owning crypto is not taxable. It becomes taxable when you sell. You will be required to pay taxes on the gains you realized from selling.

Transferring crypto to yourself

Moving cryptocurrency between wallets or accounts that you own is tax-free. You can transfer over your initial cost basis and date of acquisition to continue tracking your potential tax repercussions for when you eventually sell.

Taxable Crypto Transactions 

Converting Crypto to Cash 

When you sell cryptocurrency, you must pay taxes on the difference between the price you paid for the cryptocurrency and the price you sold it at. However, you might be able to deduct a loss from your taxes if you sold at a loss.

Converting One Crypto to Another

You will be taxed whenever you convert or swap one coin for another. This is like selling an asset and using the funds to get another. For instance, if you want to convert Bitcoin to Tron, you’ll need to sell the amount of Bitcoin you want to convert first before buying the Tron. The IRS views this as taxable because it is a sale.  

As a Gift

Suppose you’re fortunate enough to get cryptocurrency as a gift. In that case, you probably won’t pay taxes until you sell it or engage in another taxable activity, such as staking.

Using cryptocurrency to buy products and services

The IRS doesn’t see a difference between sending crypto and selling it. Before you can use an asset to purchase a good or service, you must sell it, and when it is sold, cryptocurrency becomes taxable for capital gains. For instance, you’ll be taxed if you spend Dogecoin ordering pizza or a spa treatment. 

Receiving Crypto as Payment 

Cryptocurrencies are not considered to be currencies by the IRS but rather a sort of property. If you received payment in a cryptocurrency, you must pay income taxes on the coin’s current value.

A few well-known people in 2021 accepted their wages in bitcoin, including NFL offensive tackle Russell Okung, who is probably still paying the taxes he incurred. If, like Okung, you receive payment from an employer in cryptocurrency, your cryptocurrency will be taxed. 

Cryptocurrency Mining

If you mine cryptocurrency, you’ll need to pay taxes on your income based on the coins’ fair market worth (typically the price) at the time you received them. Mining cryptocurrency for a living is subject to self-employment taxes.

Earning staking rewards

Staking awards are taxed according to their fair market value on the day you receive them, just like mining revenues.

Receiving an Airdrop

As part of a promotion or giveaway, a cryptocurrency company may offer you an airdrop. Receiving an airdrop is taxable as income; thus, you must include the sum in your tax filing.

Conclusion 

Tax rates on cryptocurrency vary depending on your income, tax filing status, and how long you held a cryptocurrency before selling it. You must pay short-term gains taxes, the same as income taxes, if you have had the coin for less than 365 days. Long-term gains taxes are due if you possess it for a more extended period.

As you have seen, there are several ways to owe taxes on cryptocurrencies. Even exchanging one cryptocurrency for another is a taxable event. It may be challenging to piece together your gains and losses and note your taxes if you don’t maintain reliable records. However, even if it was an honest mistake, you risk incurring exorbitant fines if you fail to pay your cryptocurrency taxes.