Cryptocurrency gains can be lucrative, but they can also come with hefty tax implications. If you’ve made money trading, investing, or mining digital coins, you probably understand the appeal.
It’s no secret that cryptocurrencies have skyrocketed in value over the past year, with the prices of some digital coins doubling or even tripling in value in a matter of days. Unfortunately, this sudden rise in value also comes with tax implications.
If you’ve made money trading, investing, or mining cryptocurrencies, you probably understand the appeal. And while it may not be a favorable situation, it’s important to understand the tax implications of cryptocurrency gains.
What Is a Cryptocurrency Gains Tax?
Cryptocurrency gains tax is when a taxpayer is required to report the profit they made from trading cryptocurrency. When someone sells an asset, they will have a capital gain or loss. If their proceeds are worth more than their basis, then they incur a capital gain, and that may be taxable. The IRS defines cryptocurrency as property for tax purposes.
How Do You Pay a Cryptocurrency Gains Tax?
If you’ve recently made a profit trading, investing, or mining cryptocurrencies, you may be wondering how much of that profit is taxable. The Internal Revenue Service (IRS) considers cryptocurrency to be property. When you sell property, any profits are considered capital gains and are subject to taxation.
The IRS defines two types of capital gains: short-term and long-term. Short-term capital gains are taxed at the same rate as your income tax bracket; long-term capital gains are taxed based on your marginal income tax rates. The difference between the two is how long you hold your cryptocurrency before selling it.
If you sell a cryptocurrency after owning it for less than one year, it is treated as a short-term gain and will be taxed at the same rate as your regular income tax bracket. If you hold onto a cryptocurrency for more than one year before selling it, it will be classified as a long-term gain and will be taxed at lower rates than short-term holdings.
In order to accurately calculate the amount of taxes owed on cryptocurrency holdings, traders should keep detailed records of their trades and any corresponding costs incurred in generating their profits. This information can then be used to file an accurate tax return with the IRS, which outlines any transactions that may have been missed, including mining pools or investment funds.
How Much Do You Pay in Crypto Gains Tax?
The IRS considers cryptocurrency to be property, which means you’ll have to pay capital gains on your profits. If you’ve held your coins for a year or less, you’ll have short-term capital gains. If you’ve held it for more than a year, you’ll have long-term capital gains.
If you have short-term capital gains, then the tax rate is based on your income. You will owe taxes at the same rate as your other income. If you have long-term capital gains, then the tax rate is lower.
How to Tell if You Owe Cryptocurrency Gains Tax
If you spend crypto that has increased in value from the time you bought it, you’ll have to pay crypto taxes. The following transaction types provide more information:
1. Using crypto for purchases
2. Trading crypto
3. Selling crypto for fiat
Remember, though, you don’t have to pay taxes on your crypto unless it’s gone up in value. To determine this, you first have to determine the cost basis. For example, let’s say you bought a Bitcoin for $18,000 last year.
But this year, you sell that same Bitcoin for $35,000. As such, you must report a gain of $17,000. Another example would be if you used your $18,000 to buy a $50,000 house.
You’d have to report a gain of $32,000. Or, if you traded your $18,000 Bitcoin for $40,000 worth of another cryptocurrency, you’d have to report a gain of $22,000.
Reporting Your Crypto Gains on Taxes
The IRS has a special form called Form 8949 for reporting crypto gains. On this form, you’ll need to provide the following information:
1. The name of the crypto
2. The date you acquired the crypto
3. The date you used the crypto (sold, traded, etc.)
4. How much it cost
5. Cost basis (as discussed above)
6. How much you gained or lost
You’ll need to provide this information for every crypto transaction that resulted in a gain for that tax year.
If you are considering investing in cryptocurrency, you need to be aware of the tax implications. If you are in the United States, taxes for cryptocurrency gains are determined by whether or not your cryptocurrency gains are considered property or currency.
The IRS considers the following property: stocks, bonds, mutual funds, gold, other metals, and of course, cryptocurrencies. The IRS considers the following currencies: foreign currencies and money.
Generally speaking, when you hold cryptocurrencies as property, you owe capital gains tax on any increase in value over time. When you use them as a medium of exchange or store of value, they are considered currencies and have different tax codes.
The best way to avoid paying too much in cryptocurrency gains tax is to consult a tax law firm before you make any investments.
Call Mary King for Your Crypto Gains Tax Needs
The Law Offices of Mary E. King specializes in all areas of tax law, including crypto gains tax. If you’re not sure how to handle your crypto gains, we encourage you to get in touch with us right away. We can help make sure that you follow the proper procedures as determined by the IRS.