Updated: Aug 26
Do you own any cryptocurrencies? If so, it is wise to stay on top of tax laws and regulations that may impact your crypto investments.
Will you need to pay taxes on your crypto?
Due to the fact that the IRS classifies crypto as a capital asset (a significant piece of property), you will owe taxes when you sell crypto and make a profit. Similar to more traditional investments, such as stocks traded at a gain. Therefore, you will be taxed on the difference between the price you paid for your crypto and the sale proceeds. Moreover, if you receive Bitcoin or any other digital currency in the form of payment, you will have to pay taxes on its current value.
The amount of tax you will owe from capital gains depends on how long you owned your crypto. If held for less than a year, profits will be taxed at a short-term capital gains rate, which is the same as your ordinary income tax rate. However, if your crypto was owned for over one year, you will pay taxes based on a long-term capital gains rate that is lower than your ordinary income tax rate and based on your taxable income.
Additionally, let's not forget about state taxes. Most states also treat capital gains like ordinary income, meaning that you will be taxed at a higher rate when filing your state taxes. In California, you can expect to pay an additional 1% to 13% on your cryptocurrency capital gains, depending on your income.
Can you write off crypto losses?
Taking a loss on any investment can be devastating; however, you can deduct capital losses the same way as you would for losses on stocks or bonds with crypto. These losses can help by offsetting other capital gains on sales, although you cannot write off a loss of more than $3,000.
Less Common Crypto Tax Circumstances:
If you acquired any cryptocurrency (or a portion of one) from mining, the value is taxable immediately; therefore, you do not need to sell the crypto to create a tax liability.
If you dispose of any cryptocurrency by using it in an exchange or buying goods or services, you will owe taxes if the realized value is greater than the price you acquired the crypto; thus, short-term or long-term rates will apply.
Keeping Records and Filing Proper Tax Forms:
It is always best to keep records for all cryptocurrency transactions that include how much you paid for crypto, how long you held it for, and how much you sold it for, along with any receipts for each transaction. Additionally, you will need to file certain tax forms depending on how you acquired or used your crypto:
Form 8949 - Tracks every purchase or sale of crypto as an investment, where you would include the total number of coins, the date and price it was purchased, the date and price it sold, and your gain or loss for each transaction.
Schedule D - A summary of your total capital gains and capital losses from all investments.
Schedule C - If you received crypto from mining, you would need to disclose whether you received them from a business or hobby. If you run a crypto mining business, you will most likely owe self-employment taxes if your income exceeds your expenses for the year.
Schedule 1 - If crypto was received due to a mining hobby, you must report this income on Line 8 of Schedule 1. In this case, you will not owe any self-employment tax; however, you will be limited on what you can deduct as an expense.
Even though not paying taxes on cryptocurrency capital gains could be an honest mistake, not understanding tax laws that pertain to them could result in hefty fines and penalties. The IRS has indicated that they are watching cryptocurrency investments very closely. All in all, whether you have owned or used cryptocurrency, you may owe taxes no matter how you have acquired them.
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