Cryptocurrency Taxes

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Cryptocurrency Taxes

Most cryptocurrencies, according to the Internal Revenue Service (IRS), are convertible virtual currencies. This implies they may be used as a medium of exchange, a store of value, a unit of account, and can be used in place of actual money.

This also implies that any earnings or revenue generated by your cryptocurrencies are taxed. However, there is a lot to unpack when it comes to cryptocurrency taxation since you may or may not owe taxes in certain scenarios. If you own or use cryptocurrencies, you should be aware of when you will be taxed so that you are not caught off guard when the IRS comes to collect.

  • If you benefit from the sale of cryptocurrencies, you must pay capital gains taxes on that profit, just as you would on a piece of stock.
  • If you use cryptocurrencies to purchase goods or services, you must pay taxes on the difference in value between the amount you bought for the cryptocurrency and its value when you used it.
  • You must declare bitcoin as business revenue if you accept it as payment for products or services.
  • If you mine cryptocurrency, the value of your coin at the moment it was mined is considered revenue.

Cryptocurrencies are not taxable in and of themselves—you are not required to pay taxes for having one. For tax purposes, the IRS considers cryptocurrencies to be property, which means:

  • If you sell or use bitcoin in a transaction, you must pay taxes on it. This is because capital gains or losses are triggered if the market value of the asset changes.
  • If you receive cryptocurrency as payment for business reasons, you must report it as business income.

How Do Cryptocurrency Taxes Work?

Because the IRS considers cryptocurrencies to be assets, they trigger tax events whether used as payment or cashed in. When you realize a gain—that is, when you sell, swap, or utilize cryptocurrency that has gained in value—you must pay taxes on that gain.

For example, if you purchased 1 BTC for $6,000 and sold it three months later for $8,000, you would owe taxes on the $2,000 gain at the short-term capital gains tax rate. Profits from the sale of assets held for less than a year are taxed at your regular tax rate. That ranges from 0% to 37% for the 2022 tax year, depending on your income.

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Long-term capital gains taxes would be due if the identical exchange occurred a year or more after the initial purchase. For the 2022 tax year, that would be 0%, 15%, or 20% depending on your total taxable income.

Crypto taxes function similarly to taxes on other assets or property in this regard. When they are utilized and profits are achieved, they generate taxable events for the owners. As a result, the events that trigger the taxes are the most important component in comprehending crypto taxes.

Types of Cryptocurrency Tax Events

Taxable Events

Taxable events related to cryptocurrency include:

  • Exchanging cryptocurrencies for fiat money (government-issued cash).
  • Purchasing goods, services, or property
  • The exchange of one cryptocurrency for another
  • Receiving coins that have been mined or forked

Non-Taxable Events

The following are not taxable events according to the IRS:

  • Purchasing cryptocurrency using fiat currency
  • Donating cryptocurrencies to a non-profit or charity that is tax-exempt
  • Making a bitcoin gift to a third party (subject to gifting exclusions)
  • Moving cryptocurrency between wallets

Examples of Cryptocurrency Tax Events

Make a Purchase With Crypto

Using your cryptocurrency to make a purchase is now simpler than ever. This ease, however, comes at a cost: you must pay sales tax and generate a taxable capital gain or loss event at the time of sale. Here’s how it would work if you used your cryptocurrency to buy a candy bar:

  • You send the cryptocurrency to the retailer through your wallet, including the sales tax.
  • If the value of your cryptocurrency has increased since you acquired it, you have produced a taxable event with a realized capital gain. If it’s less, you’ve suffered a capital loss. At tax time, each must be recorded.
  • Because it is a taxable event, you must record the amount spent as well as the fair market value at the time of the transaction.

So, if the value of your cryptocurrency has grown, you will be taxed twice: once for sales tax and once for capital gains tax.

Buying Cryptocurrency

Assume you purchased one bitcoin (BTC) in early 2019 for about $3,700. 1 BTC was worth $38,500 in late February 2022. You might have used it to purchase a new vehicle.

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This transaction has tax ramifications for both you and the seller.

  • The seller is required to record the transaction as gross revenue based on the fair market value of Bitcoin at the time of the transaction.
  • Because you cashed out an investment to acquire anything, you must record the transaction as a capital gain. The difference between the amount you paid for the bitcoin and its value at the moment of the transaction is the gain.

Cashing Out Cryptocurrency

When trading cryptocurrencies for fiat money, you’ll need to know the virtual coin’s cost base. The cost basis for cryptocurrencies is the entire amount you paid in fees and money. To calculate capital gains or losses when exchanging crypto for cash, deduct the cost basis from the crypto’s fair market value at the time of the transaction.

If you have a gain, the amount left over is taxed.

Your taxable earnings (or losses) on cryptocurrencies are recognized as capital gains or capital losses, just like conventional assets.

Cryptocurrency Mining

For individuals that mine cryptocurrencies, the regulations are different. Cryptocurrency miners validate cryptocurrency transactions and add them to the blockchain. They are reimbursed for their efforts with bitcoin prizes.

Unless the mining is part of a business, their remuneration is taxed as regular income. If the cryptocurrency was obtained as part of a company, miners declare it as business income and may deduct the costs associated with their mining activities, such as mining gear and power.

Exchanging Cryptocurrencies

Exchange of one cryptocurrency for another exposes you to taxation. For example, if you purchase one cryptocurrency with another, you are effectively using one to purchase another. You must disclose any profits or losses on the cryptocurrency you traded.

Many exchanges assist cryptocurrency traders in keeping all of this information organized by providing free exports of all transaction data. This may be used by the trader or the trader’s tax expert to calculate the trader’s taxes payable.

Cryptocurrency Tax Reporting

To submit your taxes correctly, you’ll need to be more organized throughout the year than someone who doesn’t have assets. For example, you must keep a record of each bitcoin transaction, including the amount spent and the market value at the moment it was utilized.

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Cryptocurrency brokers, or cryptocurrency exchanges in general, will be obliged to send 1099 forms to their customers in tax year 2023 for filing purposes in 2024.

You may accomplish this manually or by using a blockchain solution platform that will assist you in tracking and organizing this data. Platforms such as CoinTracker, for example, offer transaction and portfolio monitoring, allowing you to manage your digital assets and guarantee you have access to your bitcoin tax information.

Cryptocurrency capital gains and losses are recorded on IRS form 8949, Sales and Dispositions of Capital Assets, along with other capital gains and losses. If you’re confused about bitcoin taxes, it’s essential to consult with a licensed accountant before filing them for the first time.

How Much Tax Do I Owe on Crypto?

The amount of tax you owe on your cryptocurrency is determined by how much you spend or trade, your income level and tax bracket, and the length of time you have owned the cryptocurrency you used. For example, if you’ve owned it for less than a year, you’ll owe taxes at your regular income tax rate, and if you’ve kept it for more than a year, you’ll incur capital gains taxes.

How Can I Avoid Paying Taxes on Crypto?

There are no legal methods to avoid paying taxes on cryptocurrency other than not using it. If your cryptocurrency increased in value, you’ll have to pay taxes whether you sell it, use it, convert it to money, swap it, or trade it.

Do I Pay Taxes on Crypto If I Don’t Sell?

You only pay taxes on your cryptocurrency when you make a profit, which happens only when you sell, use, or trade it. The possession of a cryptocurrency is not a taxable event.

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