(NewsNation) — While cryptocurrency trading can often seem chaotic, important IRS regulations still come into play during tax time.
The IRS classifies cryptocurrencies like bitcoin as property, akin to stocks, bonds, or precious metals. Thus, if you sold any cryptocurrency throughout the year, you’re required to disclose it on your tax return as a capital gain or loss.
Your tax obligation will depend on the duration for which you held the cryptocurrency prior to selling. Gains may be subject to either short-term or long-term capital gains taxes. If you simply hold cryptocurrency without selling, you are not liable for taxes on unrealized gains.
It is crucial to remember that capital gains tax isn’t the only consideration; receiving cryptocurrency as payment for services can trigger ordinary income tax.
Do I Need to Pay Taxes on Cryptocurrency?
Possibly. This largely depends on how you utilize your cryptocurrency. While some transactions create taxable events, others do not.
If you decide to sell your cryptocurrency, any resulting gains or losses will generally influence your taxes as would any other investment subject to IRS regulations. Additionally, using crypto to purchase a vehicle constitutes a taxable event.
Taxation of Cryptocurrency
Cryptocurrency tax treatment can either be categorized as capital gains or ordinary income, based on how you obtained it and the duration of your holding period.
Capital Gains Taxation
If you buy bitcoin and sell it at a profit, similar to selling stocks, you must pay capital gains tax on the profit made, even if you do not convert the cryptocurrency into traditional currency.
The tax rate varies depending on whether you held the asset for more or less than a year. Selling within a year results in short-term capital gains tax, while a holding period exceeding a year allows for long-term capital gains tax, which generally has a more favorable rate.
- Short-term gains: If you purchased bitcoin for $6,000 and sold it for $9,000 within six months, you owe taxes on the $3,000 gain at the short-term capital gains tax rate, which can vary from 10% to 37% based on your income.
- Long-term gains: If you held your bitcoin for two years and sold it for the same profit, the tax rate on the $3,000 profit would be based on the long-term capital gains tax rates, which can be 0%, 15%, or 20% depending on your income and filing status.
Additionally, if you make a loss on a sale, you may deduct that loss from your taxable income, potentially lowering your overall tax liability.
Cryptocurrency received from mining is considered taxable income by the IRS, valued at the “fair market value” on the day it was received. This valuation is pivotal for determining any future gains or losses when you decide to sell.
