The IRS taxes cryptocurrency gains just like any other asset. If you made money from buying and selling cryptocurrency in 2020, you need to report it on your taxes. Here’s what you need to know.
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Cryptocurrencies have become a hot topicdue to the incredible returnsthey’ve generated over the past few years.
If you’re like most people, you’re probably wondering how these gains are taxed. Unfortunately, there’s no easy answer because tax laws vary from country to country.
Generally speaking, cryptos are treated as capital assets and are subject to capital gains tax. However, there are a few exceptions and it’s important to understand the nuances before you start trading.
In this article, we’ll explore how crypto gains are taxed in different jurisdictions and some strategies you can use to minimize your tax bill.
Short-Term vs. Long-Term Gains
The Internal Revenue Service (IRS) taxes capital gains realized from the sale or exchange of cryptocurrency differently depending on how long you held the asset before selling or exchanging it.
If you held the cryptocurrency for one year or less before selling or exchanging it, any gains you realize are short-term capital gains and are subject to your ordinary income tax rate.
If you held the cryptocurrency for more than one year before selling or exchanging it, any gains you realize are long-term capital gains and are subject to more favorable tax rates. The long-term capital gain tax rates for the 2019 tax year are 0%, 15%, or 20% depending on your income.
Ordinary Income Rates
How Are Gains From Selling or Using Cryptocurrency Taxed?
The answer to this question depends on whether the gain is considered short-term or long-term. Short-term gains are taxed at the ordinary income tax rates, which range from 10% to 37%, while long-term gains are taxed at the lower capital gains tax rates, which max out at 20%.
Here’s a brief rundown of how each type of gain is taxed:
Short-term gains occur when you sell or use cryptocurrency that you’ve held for a year or less. These gains are taxed at your ordinary income tax rate, which is based on your total taxable income for the year. For example, if you’re in the 24% tax bracket, your short-term gains will be taxed at 24%.
Long-term gains occur when you sell or use cryptocurrency that you’ve held for more than a year. These gains are taxed at the lower capital gains tax rates, which max out at 20%. For example, if you’re in the 15% tax bracket, your long-term gains will be taxed at 15%.
Capital Gains Rates
The long-term capital gains tax rates are 0%, 15% or 20%, depending on your taxable income and filing status. The 20% rate applies to gains exceeding $445,850 ($479,000 for married taxpayers filing a joint return).
To begin, it’s important to understand how the IRS taxes different types of crypto gains. For long-term capital gains, you’ll pay the lower capital gains tax rate, which is currently 0%, 15%, or 20% depending on your tax bracket.
Short-term capital gains are taxed as ordinary income at your marginal tax rate, which could be as high as 37%. The good news is that if you hold your crypto for more than a year before selling, you’ll qualify for the lower long-term capital gains rates.
There are also a few other types of crypto gains that could be subject to special tax treatment. For example, if you receive crypto as compensation for services (like mining), that income is taxed as ordinary wages. And if you receive crypto from a hard fork or air drop, you may owe taxes on the fair market value of the crypto at the time you received it.
When it comes to calculating your taxable gain, you’ll need to know the cost basis of your crypto. The cost basis is generally the price you paid to acquire the crypto, plus any costs associated with purchasing it (like commissions or fees). If you’ve held your crypto for a long time and have taken multiple trades or exchanges, things can get a bit more complicated. In that case, you may need to use specific identification methods or average cost basis methods to determine your cost basis.
Wash sales are a type of sale in which an investor buys and sells the same security within a 30-day period. This type of sale is generally not allowed in order to prevent investors from taking advantage of short-term changes in the price of a security. For example, if an investor buys a stock on Monday for $50 and sells it on Wednesday for $51, the investor would normally be able to claim a $1 capital gain. However, if the investor then buys the same stock on Thursday for $52, the wash-sale rules would disallow the capital gain and instead treat the investment as if it were sold for $50 on Wednesday.
The bottom line is that cryptocurrency gains are taxed just like any other investment. If you profit from buying and selling cryptocurrency, you will have to pay taxes on your gains. There are a few things to keep in mind, however. First, you will need to track your gains and losses carefully. Second, you may be able to deduct losses from your gains. Finally, make sure you consult with a tax professional to ensure you are complying with all the relevant laws and regulations.