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Cryptocurrency Guide | Guides

Is Your Crypto Taxable? A Simple Explanation

Author

Jay Solano

Tags

Tags Editor's Choice / Slider Posts

Reading time

4 mins
Last update

Author

Jay Solano

Tags

Editor's Choice / Slider Posts

Reading time

4 mins
Last update

Author

Jay Solano

Tags

Editor's Choice, Slider Posts

Reading time

4 mins
Last update

crypto tax

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Key Takeaways

  • Crypto is taxable, and the IRS considers most cryptocurrencies like property, meaning you pay taxes on gains (profits) from selling, using them for purchases (if the value increases), or receiving them as rewards.
  • Tax depends on how you use your crypto. Whether you owe taxes and how much depends on your use. Short-term vs. long-term holding periods and your income level affect capital gains tax rates.
  • Maintain good records of your crypto transactions (purchase prices, dates) to ensure proper tax filing. For complex situations, consider a tax professional.

Understanding Crypto Taxes

The IRS (Internal Revenue Service) considers most cryptocurrencies, like Bitcoin, as “convertible virtual currencies.” This means they function similarly to money: they can be used for purchases, hold value, and be easily traded. Any gains or income you earn from your crypto are taxable.

However, understanding crypto taxes can be confusing. Depending on how you use your crypto, you may be exempt from taxes. 

Do I Have to Pay Taxes on Cryptocurrency?

Unlike traditional cash, cryptocurrency transactions can have tax implications depending on how you use them. This means you might have to pay taxes on any gains (profits) you make when you: 

  • Sell your crypto for cash: The tax rate depends on how long you held the crypto before selling (short-term or long-term) and your overall income level.
  • Use your crypto for purchases: If the value of your crypto has increased since you bought it, this can trigger both sales tax and capital gains taxes.

Whether you owe taxes or how much depends on your situation. To ensure you’re filing correctly, it’s wise to keep good records of your crypto transactions (including purchase prices and dates) and consider consulting a tax professional.

Examples of Cryptocurrency Tax Events

Make a Purchase with Crypto

The simplicity of using crypto for everyday purchases comes with tax implications. You’ll pay the standard sales tax, but that’s not all. If the value of your crypto has increased since you bought it, you’ll also owe capital gains tax on the profit. Essentially, it’s like a double tax on the increased value. Record the amount you spent in crypto and the fair market value when purchasing to avoid surprises.

Buying Cryptocurrency

Have you bought Bitcoin for $3,700 in 2019? Using it to buy a car in 2022 (worth $38,500) triggers taxes for both parties. The seller reports the sale as income based on Bitcoin’s then-high value and might owe capital gains taxes. For you, it’s a capital gain (like cashing out an investment), so you’ll owe taxes on the profit, which is the difference between your purchase price and Bitcoin’s value when used for the car.

Cashing Out Cryptocurrency

When liquidating your crypto for cash, you must consider your cost basis. This includes the original purchase price and any fees you paid. Here’s how it affects your taxes:

  • Calculate Your Gain or Loss: Subtract your cost basis from the crypto’s fair market value at the time of sale.
  • Taxable Gain: If the result is positive (a gain), this amount is subject to capital gains taxes.
  • Reportable Loss: If the result is negative (a loss), you can report it to offset your tax burden potentially.

In simpler terms, you’re taxed on the profit you make when converting crypto to cash.

Cryptocurrency Mining

Mining crypto is a unique situation. Miners verify transactions and secure the blockchain, earning crypto rewards. Here’s how taxes come into play:

  • Hobby Mining: If mining isn’t part of a business, the rewards are taxed as ordinary income, similar to a salary.
  • Business Mining: Businesses that mine crypto report the rewards as business income. When filing taxes, these businesses can deduct related expenses (e.g., mining rigs, and electricity).

In short, the tax treatment depends on whether mining is a personal hobby or a business activity.

Cryptocurrency Staking

Owning crypto on a blockchain that uses staking means you earn rewards for essentially “locking up” your crypto to validate transactions. These rewards are taxed as income in the year you receive them.

Remember, you must consider capital gains or losses if you use or convert these rewards.

Exchanging Cryptocurrencies

Exchanging one cryptocurrency for another isn’t tax-free. Think of it like selling one crypto for cash (even though you don’t receive cash directly) and then buying another. You must report any capital gains or losses on the crypto you converted.

Luckily, many crypto exchanges offer a helping hand. They often provide free exports of all your trading data, making tax filing a breeze. This allows you, or your tax professional, to determine your tax obligations on these trades quickly.

Final Thoughts

While cryptocurrency offers exciting possibilities, remember it’s taxable like property. You’ll owe capital gains taxes on profits from selling, using it for purchases (if its value increased), or even mining or staking rewards. The amount you owe depends on how you use crypto, how long you hold it, and your income level. Keeping good records of your transactions is essential. Don’t hesitate to consult a tax professional for complex situations, as navigating crypto taxes requires a clear understanding of the rules.