Despite cryptocurrencies being decentralized, there still are tax rules that apply to cryptocurrencies which means you may owe taxes on your digital assets. Here is a guide on cryptocurrency taxes to help determine what activities incur taxes and if you need to report your gains to the IRS.
Cryptocurrencies are generally seen as a form of virtual currency used as a decentralized medium of exchange. However, the IRS classifies cryptocurrency as property similar to stocks and bonds. Whether you will have to pay taxes on cryptocurrencies depends on the circumstances of how you acquired them and exchanged them.
Does Obtaining Cryptocurrency Incur Taxes?
Purchasing cryptocurrency using fiat money, such as U.S. dollars, and storing it on an exchange is not a taxable event. As such, you can buy and hold crypto as long as you like without having to pay any taxes, even if the value of your assets increases while holding it.
On the other hand, mining, staking, and receiving cryptocurrency as payments all qualify as taxable events considered as taxable income by the IRS. The amount owed depends on the fair market value of the cryptocurrency at the time you acquired it.
Taxes on Selling Cryptocurrency
Selling your crypto or exchanging it for another cryptocurrency may incur taxes. If you have realized a profit on your crypto transactions, then you must report it to the IRS and pay capital gains tax. Those who held cryptocurrencies for less than one year are subject to paying tax on short-term capital gains. Holding these assets for longer than a year will mean paying long-term capital gains tax instead, which typically has reduced rates that could reach as low as 0%. Also, you can write off crypto losses on taxes when you realize losses while trading or selling. You can use these losses to offset some of your capital gains by up to $3000. Any losses exceeding $3000 can be carried over to the next year.
How to Determine the Amount of Cryptocurrency Tax You Owe
When dealing with cryptocurrencies, it is up to you to document and keep track of all your transactions and taxable events. This involves taking note of the fair market value after each transaction and tracking the cost basis. This can become a tedious process if you tend to trade and exchange cryptocurrencies very frequently. Some crypto exchanges and brokers have begun issuing a Form 1099-B that documents all your crypto transactions to help keep track of any taxable events.