Table of Contents
- 1 What is Capital Gains Tax?
- 2 Short-Term Capital Gains
- 3 Long-Term Capital Gains
- 4 How Does Capital Gains Tax Apply to Your Crypto?
- 5 Non-Taxable
- 6 Taxable Capital Gains
- 7 How Much Do I Pay in Cryptocurrency Taxes?
- 8 In Terms of Cryptocurrency Earnings:
- 9 Capital Gains and Loss Calculation
- 10 Understanding Your Cost Base
- 11 Taxable Capital Gains for Long-Term
- 12 Taxable Capital Gains for Short-Term
- 13 Addressing Capital Losses
- 14 When Should Capital Gains Taxes Have to be Paid?
If you consider investing in cryptocurrency or are already a crypto investor, it is vital to comprehend how and when your assets are taxed.
This post will discuss what capital gains tax is, how it applies to your cryptocurrency and other aspects.
What is Capital Gains Tax?
Capital gains tax is a tax levied on earnings derived from the sale of an individual investment such as a share, bond, money market fund, ETF, enterprise, or real estate. The tax percentage on the gain is mainly determined by whether that’s a long-term or short-term holding.
Short-Term Capital Gains
Short-term capital gains, or assets held for less than a year, are taxed at the same rate as regular income tax rates, which vary from 0% to 37%.
Long-Term Capital Gains
Long-term capital gains taxes impose on earnings generated from the sale of an investment asset for longer than a year. The tax rate might be 0%, to 20%, depending on various characteristics such as income bracket and marital status.
How Does Capital Gains Tax Apply to Your Crypto?
In 2014, the Internal Revenue Service (IRS) deemed cryptocurrencies digital money rather than a national currency like USD.
Because of this, it has been taxed on its capital gains in the same way as other capital assets like shares, bonds, or real estate.
You only pay capital gains taxes on the actual income you made when you sold or exchanged your bitcoin, just like with stocks or real estate. However, there are some things you should be aware of about capital gains tax in crypto. To determine whether you owe taxes, consider how you utilized your cryptocurrency.
Offering a gift
If you give cryptocurrency to someone else without buying a product for services and goods, it is considered as a gift, even though you didn’t intend it to be that way.
Accepting a gift
If you receive cryptocurrency as a gift, you won’t have to pay taxes until you sell it or indulge in other taxable activities like mining.
Sending cryptocurrency to oneself
Moving cryptocurrency across wallets or accounts is not taxable. You can carry over your initial cost basis and acquisition date to keep tracking your possible tax implications when you sell.
Purchasing cryptocurrency with money and holding it
Buying and containing cryptocurrency is not taxable. When you sell, that’s the time you are being taxed.
Donating cryptocurrency to a tax-exempt organization or non-profit
You may be eligible to claim a charitable deduction if you donate cryptocurrency directly to a non-profit organization.
Taxable Capital Gains
Converting cryptocurrency to another
When you use currency like bitcoin to buy ether, you must technically trade your bitcoin before purchasing the new asset. The IRS deems this to be taxable because it is a sale. If you sold your cryptocurrency for more than you bought it for, you’d have to pay taxes on the discrepancy.
Using cryptocurrency to purchase products and services
If you use cryptocurrency to order a meal, for instance, you will almost certainly have to pay taxes on the purchase. Using cryptocurrency isn’t all that different from trading it to the IRS. Before you can swap the asset for a good or service, you must first sell it, and selling crypto is subjected to capital gains taxes.
Trading cryptocurrency for cash.
If you sell your bitcoins for more money than you purchased for them, you’ll have to pay taxes on the difference. You can deduct a loss from your taxes if you sell at a loss.
How Much Do I Pay in Cryptocurrency Taxes?
Continue reading if you hold cryptocurrencies and are unsure about the taxes on cryptocurrency gains. If the capital tax rate increases, it’s crucial to understand how cryptocurrencies gains are taxed and what you can do to limit your tax bill.
Calculating your revenue, sales, and losses might help you predict how much tax you’ll owe. Here’s how:
In Terms of Cryptocurrency Earnings:
The crypto you earn as income, such as mining, staking, and rewards, is subject to the same income taxes, frequently not deducted or withheld. When you declare your wages, you’ll typically owe the income tax rate that corresponds to your tax bracket. If you’ve made a lot of money through cryptocurrency, it may impact your tax bracket, resulting in a considerable tax rate on your income.
For more information, see the most recent federal income tax guidelines.
Capital Gains and Loss Calculation
To determine how much you lost or gained, you must first assess your cryptocurrency’s capital purchases referring to your cost basis.
Understanding Your Cost Base
When you purchase cryptocurrencies, your cost basis is determined by the amount you pay for crypto. If you got cryptocurrency by mining or stake, your cost basis is defined by the actual market value when you received it.
When you trade your cryptocurrency, you can deduct your cost basis from the market price to determine your capital gain or loss. If your proceeds surpass your cost, that’s your capital gain. If not, you will face a capital loss.
Taxable Capital Gains for Long-Term
Long-term is taxed at a lower capital gains rate. These rates start from 0 percent to 20% at the federal level and may vary according to your income. Higher-income earners may be liable to the 3.8 percent Net Investment Income Tax on profits or other earnings.
Taxable Capital Gains for Short-Term
Short-term profits are taxed at your ordinary-income level, typically higher and less advantageous.
Remember that taxable events occur when you experience losses or gains. Meaning you sold your cryptocurrency for money, or you may convert it to another cryptocurrency or spend it on an item or service. If you own the source shares, the gains are unrealized.
Addressing Capital Losses
You have incurred a capital loss when you sell the stock for less than what you purchased for it. However, the loss is an advantage. You can declare a capital loss if its value has decreased by the period you sell or use it. Capital losses aren’t all awful; they might reduce your total tax payment by compensating other profits.
If you have more losses than profits or no gains at all, the most you can claim each year to counterbalance other income is $3,000. Any remaining amount is carried over to the following years until the entire loss bill is levied.
When Should Capital Gains Taxes Have to be Paid?
Capital gains tax is due by the regular tax date of filing for the year where the capital gain is achieved unless such an investor is required to make quarterly due tax payments. For example, if you earn a capital gain this year, you will almost certainly face capital gains tax by the same month of the following year.