As the popularity of cryptocurrencies continues to grow, so do the questions surrounding their tax implications. One of the most common questions we get here at Coinbase is whether or not converting crypto to fiat is a taxable event.
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What is Coinbase?
Coinbase is a digital asset exchange company based in San Francisco, California. They broker exchanges of digital currency like Bitcoin, Ethereum, and Litecoin with fiat currencies like the United States Dollar (USD) and the Euro (EUR). Coinbase also provides a cryptocurrency wallet service.
What is cryptocurrency?
Cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its biggest allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.
Cryptocurrency is also considered by some economists to be a short-term and speculative investment due to its high volatility and lack of intrinsic value.
What is a taxable event?
When you convert one cryptocurrency to another, or when you convert cryptocurrency to fiat currency, this is generally considered a taxable event. You will owe taxes on the gains from the conversion, and you may also be subject to capital gains tax.
There are a few exceptions to this rule. If you are converting between two different types of cryptocurrency, such as bitcoin and ethereum, and you are not selling or otherwise cashing out the transaction, then it is not considered a taxable event. However, if you are converting cryptocurrency to fiat currency, such as US dollars, this is always considered a taxable event.
If you have any questions about whether or not your crypto conversion is a taxable event, we recommend speaking with a tax professional.
What are the tax implications of converting cryptocurrency on Coinbase?
The tax implications of converting cryptocurrency on Coinbase will depend on how the conversion is classified by the IRS. If the conversion is classified as a sale, then you will owe capital gains taxes on the difference between the fair market value of the cryptocurrency at the time of conversion and your cost basis in the currency. If the conversion is classified as a trade, then you will not owe any capital gains taxes, but you may owe other taxes, such as income taxes or self-employment taxes.
What are the tax implications of selling cryptocurrency on Coinbase?
When you convert cryptocurrency to cash on Coinbase, you are taxed on the gains from that sale. The Internal Revenue Service (IRS) considers cryptocurrency to be property for tax purposes. This means that when you sell your cryptocurrency for cash, you will owe capital gains tax on the profits from that sale.
The amount of tax you owe will depend on how long you held the cryptocurrency and what your income tax bracket is. If you have held the crypto for less than a year, you will owe short-term capital gains tax; if you have held it for longer than a year, you will owe long-term capital gains tax. Short-term capital gains are taxed at your marginal income tax rate, which can be as high as 37% for some taxpayers; long-term capital gains are taxed at a lower rate, which is either 0%, 15%, or 20% depending on your income.
If you have any questions about how to calculate your taxes owed on cryptocurrency conversions, we suggest consulting with a tax professional.
What are the tax implications of buying cryptocurrency on Coinbase?
The short answer is that it depends on how you use cryptocurrency.
If you use cryptocurrency to buy goods or services, you may owe taxes on your purchase. The amount of tax you owe will depend on whether you bought the cryptocurrency as an investment or used it to pay for goods or services.
If you bought cryptocurrency as an investment, you will owe capital gains tax on any increase in value when you sell it. The amount of tax you owe will depend on your tax bracket and how long you held the cryptocurrency before selling it.
If you used cryptocurrency to pay for goods or services, you will owe taxes on the fair market value of the goods or services at the time of purchase. The amount of tax you owe will depend on your tax bracket and the local sales tax rate.
What are the tax implications of transferring cryptocurrency on Coinbase?
The Internal Revenue Service (IRS) has not yet issued specific guidance on the tax treatment of cryptocurrency transactions. However, based on current tax principles, it is likely that the conversion of one cryptocurrency to another would be a taxable event (i.e., you would realize a capital gain or loss on the transaction).
If you hold your cryptocurrency as a capital asset, you will generally be subject to capital gains taxes when you sell or exchange it. Short-term capital gains are taxed at your ordinary income tax rate, while long-term capital gains are usually taxed at a lower rate.
If you have questions about how to report your Coinbase transactions on your taxes, we recommend consulting with a tax advisor.
What are the tax implications of storing cryptocurrency on Coinbase?
The tax implications of storing cryptocurrency on Coinbase will depend on how you use it. If you use it to make purchases, there may be capital gains taxes due on any profits you realize when you sell. If you hold it as a long-term investment, there may be no taxes due until you sell.
If you use Coinbase to convert your cryptocurrency into another currency, there may be taxes due on the exchange. Coinbase is not responsible for calculating or remitting any taxes owed on your behalf, so it’s important to understand the tax implications of your transactions before using the platform.
For more information, please consult a qualified tax professional.