What Are the Taxes on Cryptocurrency Activity?
No matter if you’re scrolling through social media or reading the latest news, chances are high that you’ll see mentions of cryptocurrency in mainstream culture. Cryptocurrency is becoming increasingly popular for those who want to diversify their investment portfolio, but investors need to prepare for the tax liabilities associated with these transactions.
If you’re wondering what the taxes are on cryptocurrency, continue reading for helpful information from our experts.
How Cryptocurrency Is Taxed
Many cryptocurrency investors think that because cryptocurrency isn’t backed by the US government, the Internal Revenue Service (IRS) is less likely to pursue those who fail to report the income. This misconception is false as all cryptocurrency gains and losses need to be reported to the IRS. In addition, the IRS has invested heavily in resources to help track down crypto tax cheats and continues to make it a priority.
When you purchase a capital asset of any kind, whether it is a cryptocurrency, a stock, bond, or any other type of investment, your cost to acquire the item is your basis. If you want to sell the asset, you’ll compare the original purchase price to your sale price to determine if you have a capital gain or a capital loss.
How to Calculate Cryptocurrency Taxes
In addition to comparing your basis to your gross proceeds, you’ll need to consider the amount of time you held the asset to determine if it is a short-term or long-term capital gain.
Short-Term Capital Gains and Losses
If you buy and sell a cryptocurrency asset in a one-year period, you’ll incur a short-term capital gain if you sold it for more than the original price. If you sold it for less than the original price, it is a short-term capital loss. These short-term gains or losses are subject to tax rates that you’d pay on other forms of income and they will be taxed at your ordinary income tax rate ranging from 10-37% depending on your tax bracket.
Long-Term Capital Gains and Losses
This refers to buying an asset and selling it after a one-year period. The difference in net sales proceeds and your cost basis is either a long-term capital gain or loss. The tax rates on long-term gains are typically lower, with three tax rates for long-term capital gains— 0%, 15%, or 20% depending on your income. The majority of taxpayers will fall in the 15% tax bracket. While it’s possible to offset your capital gains with capital losses, this offset needs to apply to the same type of asset.
Cryptocurrency as Ordinary Income
Obtaining cryptocurrency doesn’t always happen through trading. You may receive it by mining it, as a promotion, or even free from some platforms. Staking cryptocurrency is another method to obtain it and allows you to earn interest by pledging your tokens to a validation node for the network. You’ll owe taxes based on the fair market value of the currency on the day you received it, counting it as ordinary income. Think of this as the same in substance to earning interest on a savings account balance.
Crypto Taxes Are Easy Through Founder’s CPA
We know that this topic can be confusing, but our cryptocurrency experts have the technical skill and expertise to help you accurately file your 2021 crypto taxes. Get in touch with us for a complimentary assessment to see how we can help you navigate cryptocurrency taxes.