Hot Features
Premium
Trade smarter, not harder: Unleash your inner pro with our toolkit and live discussions.
Read about the basics of taxes on cryptocurrency, from capital taxes to income taxes, and also learn about tax-saving strategies.
Cryptocurrency has exploded in popularity in recent years, spawning a new generation of millionaires and billionaires. Despite its rising popularity, determining bitcoin taxation is difficult and complicated.
In the previous year, the Internal Revenue Service answered several unanswered issues, but there are still many unanswered questions about bitcoin taxation, and it’s critical to make sure the process of filing and reporting taxes is smooth.
Apart from that, the government’s latest laws and bills make it all the more vital to comprehend bitcoin taxes. Let’s take a look at the basics of taxes on cryptocurrency in the USA.
Taxes On Cryptocurrency
The IRS considers cryptocurrencies to be property rather than currency. This means that you must record capital gains or losses and pay the proper taxes on cryptocurrency, just like you would with equities, real estate, or bonds.
The rates of taxes on cryptocurrency are determined by two factors-
- The holding period of assets (i.e., the period between purchasing and selling)
- Your individual tax bracket for the year.
Based on the holding period of assets, there are two categories of taxes on cryptocurrency-
a. Long-term capital gains
The long-term capital gains tax applies when you sell your crypto assets after holding them for more than a year. In the USA, according to the IRS guidelines, the long-term capital gains tax rates range from 0% to 20%.
b. Short-term capital gains
The short-term capital gains tax applies when you sell your crypto assets after holding them for less than a year. As per the IRS guidelines, the short-term capital gains tax rates range from 10% to 37%.
HODL-ing your crypto assets is not taxable. However, if you take any actions such as swapping the crypto you own with another, receiving cryptocurrency by airdrop, and so on, you’ll be subjected to paying crypto taxes.
So, let’s take a look at the taxable and non-taxable events in the USA according to the IRS.
Taxable Events
Here are a few crypto taxable events in the USA-
Selling Your Crypto
As mentioned above, long-term capital gains are defined as holding a cryptocurrency for more than a year; short-term capital gains are defined as holding a cryptocurrency for less than a year and are taxed as per your income category.
Receiving Mined Crypto
Receiving new crypto as a result of a crypto airdrop is taxable. You’ll have to report it under income taxes when you file your taxes on cryptocurrency.
Trading Your Crypto
Swapping one crypto for another might result in a taxable event.
Buying Goods & Services
If you bought something with your crypto, this is considered selling your crypto and will result in capital gains.
Non-Taxable Events
However, there are also some events that are non-taxable, such as-
- Buying cryptocurrency using fiat currency
- Transferring cryptocurrency from one wallet to another
- Gifting cryptocurrency to family or friends (up to $15,000 on a carryover basis)
- Donating Bitcoin to a non-profit tax-exempt organization (carryover basis)
All sorts of transactions are subject to the same approach when it comes to bitcoin taxation. Even if you spend your crypto assets on commonplace products like getting yourself a pizza, or a Starbucks order, the IRS needs you to keep track of the transaction and compute the capital gain or loss.
Saving Taxes On Cryptocurrency
The Private Contract Common Law Complex Trust has the authority to accumulate a trust corpus and reinvest money in the trust’s development for the beneficiaries’ interest. The trustee can allocate any capital gains to the fund when the transactions are categorized as securities, avoiding the requirement to pay taxes on bitcoin capital gains.
The fundamental to this strategy’s success is that-
- Firstly, the bitcoin must be moved into the trust’s name (new owner). There should be no taxable event as a result of this.
- Register new platform accounts in the name of the trust on your trading platform – Binance, Coinbase, Kraken, and so on — after the crypto is authorized by the trust.
The Bottom Line
Cryptocurrencies have grown in popularity as an asset class, but taxes on cryptocurrency remains a complicated and unclear issue.
While the IRS has issued updated guidelines, traders and investors should make sure they’re using the proper software to automate capital gains and losses calculations, as well as consulting with an expert accountant to make sure everything is done correctly.
FAQs
1. Do I have to pay taxes on cryptocurrency?
Yes, you have to pay taxes on cryptocurrency. The IRS considers cryptocurrencies to be property rather than currency. This means that you must record capital gains or losses and pay the proper taxes on cryptocurrency, just like you would with equities, real estate, or bonds.
2. How much taxes do you pay on crypto?
Based on the holding period of assets, there are two categories of taxes on cryptocurrency, long-term capital gains, and short-term capital gains. Long-term capital gains tax rates range from 0% to 20%, whereas short-term capital gains tax rates range from 10% to 37%.
3. What are non-taxable events?
There are also some events that are non-taxable, such as-
- Buying cryptocurrency using fiat currency
- Transferring cryptocurrency from one wallet to another
- Gifting cryptocurrency to family or friends (up to $15,000 on a carryover basis)
- Donating bitcoin to a non-profit tax-exempt organization (carryover basis)
