Can cryptocurrency be taxed?

Can cryptocurrency be taxed?

The whole world is watching as Bitcoin and the rest of the cryptocurrency market keep notching new record highs. But can cryptocurrency be taxed? The Internal Revenue Service (IRS) is watching, too. If you own cryptocurrencies, you need to understand the tax liability impact every time you buy, sell or mine them.

What Is Cryptocurrency?

A cryptocurrency is a digital or virtual currency, which makes it nearly impossible to counterfeit or double-spend. A blockchain technology— a disparate network of computers enforces a distributed ledger, bases cryptocurrencies on decentralized networks. A defining feature of cryptocurrencies is that a central authority doesn’t issue them. Therefore, this renders them theoretically immune to government interference or manipulation.

How Tax Purposes treat cryptocurrencies

Many people are quick to point out the non-governmental backing. Thus, subject to less regulation than currencies like the dollar or euro. This lack of oversight led many to believe that cryptocurrency investors participate in elusive and anonymous transactions, avoiding paying taxes. However, this belief is absolutely false. In the US, crypto exchanges must report user activity on gains/losses to the IRS and tax cryptocurrency like traditional stocks.

Cryptocurrency is “property” for federal income tax purposes, meaning the IRS treats it as a capital asset. This means the crypto taxes you pay are the same as the taxes you might owe.

For instance,  you purchase a capital investment– stock, house, Bitcoin– you initiate a basis equal to your cost. When you sell a capital asset, you compare your net sales proceeds to your original basis to determine a capital loss/gain. If the proceeds exceed your original cost basis, you realize a capital gain. When reversed, you’ve locked in a capital loss.

Capital Gains vs. Capital Losses

Here’s some good news for crypto taxes: You only owe taxes if you spend or sell it and realize a profit. Selling or spending your crypto at a loss doesn’t owe any taxes on the transaction.

For example, you buy $10,000 in Bitcoin and sell for $13,000, your taxable gain is $3,000. However, selling the same Bitcoin for $7,000, you owe nothing in taxes. Furthermore, this could even use part of $3,000 losses to offset other gains.

How Much Do I Owe in Crypto Taxes?

How much you owe in cryptocurrency taxes depends on your annual income and how long you’ve held your cryptocurrency.

• If you’ve owned your coins for less than one year before spending or selling them, any profits would be short-term capital gains, you receive a normal income tax rate.
• If you’ve held your crypto for one year or more, any profit would be long-term capital gains, your annual income receives a lower rate tax.

Earning cryptocurrency by mining it, or receive it as a promotion or as payment for goods or services, counts as regular taxable income. You owe tax on the entire value of the crypto on the day you received it at your regular income tax rate.

In addition, if you hold cryptocurrency from these activities, and either spend or sell them later for more than their value when you first received them, you owe short- or long-term capital gains taxes on the profits.