Everyone is talking about crypto, but no one seems to know if it’s taxable. If you’ve made money investing in crypto, you may be wondering if you have to pay taxes on your profits.
We’re here to help make the process as easy as possible. In this blog post, we’ll break down everything you need to know about crypto and taxes.
Is crypto taxable? Yes, crypto is taxable. Cryptocurrencies are taxed as property in the United States, and investors are required to pay a specific rate of tax on capital gains when they sell their crypto.
Is Crypto Taxable?
You must pay taxes on cryptocurrencies. The IRS considers cryptocurrency to be property, and transactions involving it are subject to the same rules as those involving other property.
When you sell, trade, or dispose of cryptocurrency in any manner and realize a profit, taxes are required. For example, if you buy $1,000 worth of crypto and then sell it for $1,500 later on, you will be required to report and pay capital gains tax on the difference of $500. You may deduct your losses
Buying cryptocurrency on its own is not a taxable occurrence. Even if the value of your investment rises, you may buy and hold bitcoin without paying taxes. There must be a taxable event, such as selling the cryptocurrency, before it can happen.
The IRS has been making efforts to ensure that cryptocurrency investors pay their taxes. Tax filers must answer a question on Form 1040 regarding any virtual currency-related transaction they had during the year.
Clients who have more than 200 transactions and more than $20,000 in trading on a crypto exchange are required to submit a 1099-K. The IRS has also served summonses on bitcoin exchanges seeking investors who had at least $20,000 in cryptocurrency trades between 2016 and 2020.
Calculating Taxes On Crypto
The tax rate for cryptocurrencies is determined by your income, filing status, and length of time you held the crypto before selling it. If you owned it for 365 days or less, you will be subject to short-term gains taxes, which are equivalent to income taxes. You will pay long-term gains taxes if you possessed it for more than 365, which will be paid at a lower crypto tax rate on it.
You have the option of selling your older coins to pay a lower long-term gains tax rate. Consider you’ve been buying Bitcoin (CRYPTO: BTC) on a regular basis for the previous two years and now want to sell some. Selling Bitcoin has been held for more than a year will be considered a long-term gain, and you need to pay a lower tax rate on it.
How to determine if you owe crypto taxes
If you use your cryptocurrency in any way and it has appreciated in value, you must pay taxes on it.
Here are the various types of taxable events that may occur during cryptocurrency transactions:
- Selling cryptocurrency for a fiat currency
- Using cryptocurrency to purchase goods or services
- Trading different types of cryptocurrency
If the value of your crypto has increased, these are only taxable events. To see if you must pay crypto taxes, calculate your cost basis, which includes the total price you paid for your crypto. Then compare that to the sales or gains when you converted it into cash.
Let’s assume you recently purchased one bitcoin for $20,000. These are examples of taxable occurrences:
- You’ll report $30,000 in profits if you sell one bitcoin for $50,000.
- If you spend one bitcoin to acquire a $45,000 automobile, you’ll record $25,000 in gains.
- If you sell one bitcoin for $50,000 in another cryptocurrency, you’ll report $30,000 in profits.
Trades are where crypto taxes get complicated. A taxable event is referred to as a crypto trade. If you exchange one cryptocurrency for another, you must report any profits in U.S. dollars on your tax return.
Because cryptocurrencies are so volatile, it’s important to keep track of how much you’ve gained or lost in U.S. dollars whenever you trade them. You may then record your cryptocurrency gains or losses accurately this way. If tracking gains and losses are too time-consuming, cryptocurrency stocks might make it easier than trading specific coins.
How To File Taxable Crypto On Your Federal Tax?
The gains and losses from cryptocurrency transactions are recorded on Form 8949. To complete this form, provide the following information about your crypto transactions:
- Name of the cryptocurrency
- The date you acquired it
- The date you sold, traded, or otherwise disposed of it
- Proceeds or sales price
- Cost basis
- Total gain or loss
Repeat this procedure for each taxable crypto event you recorded in the year.
State Taxes On Crypto
The majority of states have yet to provide guidance on the tax treatment of virtual currency or cryptocurrency. A major issue for state tax authorities is whether or not a purchase of virtual currency or cryptocurrency is a taxable sale for sales and use tax purposes.
So, at the state level, what is your role in taxes on cryptocurrency?
The following are the states and their rules for tax on crypto
California: Cash Equivalent. California classifies bitcoin and other virtual currencies as equivalents to cash, meaning it taxes them the same.
Delaware: No Tax
Kentucky: Cash Equivalent. Bitcoin is treated as a cash equivalent in Kentucky, and sellers who accept bitcoin payments must convert the bitcoin into US dollars and charge sales and use tax.
Michigan: Cash Equivalent. According to the Michigan Department of Treasury, purchases of convertible virtual currency are not taxable because the virtual currency is not tangible personal property. The phrase “a digital representation of value that has an equivalent value in real currency” was used by the department when referring to virtual currency.
Minnesota: Cash Equivalent. Bitcoin is treated as an intangible the same as cash.
Missouri: Cash EquivalentSales of bitcoin are not taxed in Missouri. The state classifies bitcoin as a cash equivalent and sales of bitcoin as nontaxable sales of intangibles.
Montana: No Tax
New Hampshire: No Tax
New Jersey: Cash EquivalentNew Jersey considers bitcoin to be equivalent to cash and treats purchases with it similar to those made in real currency. Virtual currencies, such as bitcoin, are treated as cash equivalents by the state of New Jersey and taxed accordingly.
New York: Cash Equivalent. In New York, virtual currencies, such as bitcoin, are treated the same way as cash equivalents. Purchases of virtual currencies are taxed in the same manner as purchases made with cash.
Oregon: No Tax
Wisconsin: Cash Equivalent. Virtual currency is not subject to income tax because it represents an intangible right rather than tangible personal property or a taxable service, according to the IRS.
Other states have no guidance on the taxability and non-taxability nature of crypto.
In the United States, cryptocurrencies are taxed as property. This means that when you sell your crypto for a profit, you’re required to pay capital gains tax on that money. The rate of tax depends on how long you’ve held the crypto and your income level. For more information on cryptocurrency taxation in the US, consult a qualified accountant or financial advisor.