How is cryptocurrency taxed?
There has been no shortage of excitement about the ability to trade in cryptocurrencies over the last few years. In fact, there are literally thousands of these currencies that now trade on public markets every day.
Some people have made and lost major fortunes on these markets as they attempt to figure out where the next major currency is going to appear. Before you get too excited about it, it is worth looking at how cryptocurrency is taxed.
We want to provide you with the information that you need to make the most successful financial choices that you possibly can. We believe that the best way to make this happen is to provide you with the information that you require to make wise choices as far as how you spend your money and how that money is taxed by the government. You can know more about it here.
Both of these topics are important to know about when trying to make choices about how to manage your funds.
Cryptocurrencies may be taxed as business or individual income
The way that your cryptocurrencies are taxed depends on how you received them and for what purposes. Many businesses accept cryptocurrencies as payment for goods and services these days, and that is clearly business income that they would need to claim.
However, there are also individuals who trade in cryptocurrencies all the time, and the buying and selling that they do of these currencies would be taxed via capital gains. That is an individual tax that one would need to pay based on the profits that they earned on their crypto trades.
Crypto is viewed as an asset by the IRS
The IRS views cryptocurrencies as an asset. They are to be taxed as an asset for tax reporting purposes. It is quite common for people who hold these currencies to not necessarily think of them as a physical good in any sense.
They view them merely as something that they would like to hold on to for the long term in the hopes of cashing in a big score at some point down the road. However, the IRS has recognized the value of cryptocurrencies as an actual asset, and they are interested in taxing them in that way.
You will have to pay taxes on the portion of the transaction that is viewed as profit in your case. What this means, for example, is that you may need to consider the difference between what you paid for a specific cryptocurrency and what you end up selling it for. Someone may have jumped in on Bitcoin at a price of $30,000 per coin and sold it off for $36,000 per coin. If that is the case, then they would need to pay taxes on the $6,000 profit that they were able to generate on that trade.
Short vs. long-term capital gains
You need to consider if you are going to need to pay short-term or long-term capital gains on the trade that you have made. The answer to this lies in how quickly you sold the crypto that you bought.
If you placed a sell order on a currency within one year from when you bought it, then you will owe short-term capital gains on that trade. The amount that you would have to pay for this will range between 0-37% depending on your income.
Long-term capital gains are not nearly as bad on the bottom line. The amount that you would likely pay for this would depend on your income as well, but the percentages that you would deal with in this case would be between 0-20% of your capital gain for the 2022 tax year.
There are various taxable events that can occur that cause you to potentially owe money on the cryptocurrency that you have purchased. A few of those events include the following:
- Exchanging the currency for a fiat currency (such as the US dollar)
- Mining more of the currency
- Receiving the currency as a payment
The list goes on from there, but it is safe to say that there are a number of things that can put you on the radar of the IRS when you are moving your cryptocurrency around. It is something that they are starting to nail down on more seriously.
The IRS realizes that many people are moving money around in cryptocurrencies, and they want to be sure that they are able to receive their fair share of those moves or else it will be very challenging for the organization to fund the programs that it needs to fund and do what it needs to do to fulfill its mission to the government.
Thus, it is important to make sure you have your ducks in order when it comes to taking care of your taxes on cryptocurrency transactions.