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This article will reveal how cryptocurrency is taxed.
Everyone is paying attention as Bitcoin and the other cryptocurrencies keep attaining new records. The Internal Revenue Service (IRS) is not left out. If you own Bitcoin, Ethereum, or other cryptocurrencies, you need to understand the impact they have on your tax liability whenever you buy them, sell them, or mine them.
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How Cryptocurrency is Taxed
Cryptocurrency taxes are based on a 2014 IRS directive that determined crypto should be taxed as a capital asset (such as bonds or stocks), and not as a currency (like Euros and Dollars). This decision opens people that own cryptocurrency to more complicated taxes.
Capital taxes are usually taxed whenever you sell them at a profit. When you buy goods or services with cryptocurrency, and the amount you spent has increased in value over what you paid, your purchase incurs capital gains taxes.
Let’s assume you bought $30 worth of Bitcoin and held it as it increased in value to $250. If you used the Bitcoin to buy $250 worth of items, you will need to pay capital gains taxes on the $220 profit you realized, although it appeared as if you spent the Bitcoin, rather than selling it. It is the same thing for the IRS.
The decision of the IRS to tax cryptocurrency as a capital asset may be due to the way most people treat it. According to Jeff Hoopes, an associate professor at the University of North Carolina and research director of the UNC Tax Center, “I assume [the IRS] decided this because most people hold crypto as an investment, and we tax the appreciation on capital assets held as an investment.”
Capital Gains Versus Capital Losses
Here’s a piece of great news for cryptocurrency taxes: You owe taxes only if you spend or sell crypto and make a profit. If you sell or spend your cryptocurrency and incur losses, you will not owe any taxes on such transactions.
For instance, if you purchased Bitcoin for $10,000 and sold it for $13,000, $3,000 would be your taxable gain. However, if you sold the same Bitcoin for $6,000, you will not owe anything in taxes. You can even use part of the $4,000 in Bitcoin losses to offset other investment gains.
How To Determine The Amount You Owe in Crypto Taxes
The amount you owe in cryptocurrency taxes depends on what you earn per year and how long you hold the cryptocurrency.
If you have owned your Bitcoins for less than a year before you spend or sell them, the profits would be short-term capital gains and would be taxed at your normal income tax rate.
If you have held your Bitcoin (or other cryptos) for at least one year, any profit would be categorized as long-term capital gains and would be taxed at a lower rate. This will be determined by your annual income.
If you earn your cryptocurrency through mining, or if you receive it as a promotion or payment for goods or services, it will be categorized as regular taxable income. You will need to pay tax on the whole value of the crypto on the day you received it. This will be calculated at your regular income tax rate.
Also, if you hold cryptocurrency from these activities, and end up spending or selling them at a higher value than when you first got them, you will pay short- or long-term capital gains taxes on the gains, depending on how long you held it.
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