Your Guide to Cryptocurrency Taxes

Is there a tax on cryptocurrencies? When investing in cryptocurrencies, you have to understand how the IRS (Internal Revenue Service) taxes these investments and what constitutes a taxable event.

• The IRS treats cryptocurrencies as goods, meaning that, when you buy, sell, or exchange them, they count as a taxable event that generates a capital gain or loss.

• When you earn income from activities with cryptocurrency, taxes are applied as if they were ordinary income.

• These taxable events are reported through various forms on your tax return.

• You must keep records of your transactions so that you can report to the IRS all cryptocurrency activities you have performed during the year. The rise and attractiveness of cryptocurrencies as an alternative payment method

In recent years, interest in cryptocurrencies has grown tremendously. Whether you accept cryptocurrencies, pay with them, have invested in them, are an experienced virtual currency broker or have received a small amount as a gift, it is important that you understand the tax consequences they generate.

The term “cryptocurrency” refers to a type of digital asset that can be used to buy goods and services, although many people invest in cryptocurrencies just as they invest in stocks. Part of its appeal is that it is a decentralized medium of exchange, meaning it operates without the involvement of banks, financial institutions, or other central authorities.

In addition, cryptocurrencies are secure. Transactions are encrypted with specialized computer code and recorded on a blockchain: a digital and public ledger in which each new entry must be reviewed and accepted by all members of the network.

You may have heard of Bitcoin or Ethereum as two of the most popular cryptocurrencies, but there are thousands of different types of cryptocurrencies around the world.

There are people who refer to cryptocurrency as a type of virtual currency, but the IRS does not consider it a currency. According to IRS Notice 2014-21, the IRS considers cryptocurrencies to be a good and, if necessary, capital gains and losses should be reported on Schedule D and Form 8949, if necessary.

Despite the decentralized, virtual nature of cryptocurrencies, and as the IRS treats them as if they were goods, you will have to pay taxes on the profits or income you earn from the cryptocurrency activities in which you participate.

If you buy, sell or trade cryptocurrencies, you will have capital gains or losses. As with other investments that the IRS taxes, your profit can be short-term or long-term, depending on how long you had the cryptocurrency before selling or exchanging it.

• If you held the cryptocurrencies for a year or less before spending or selling them, the profit made is usually a short-term capital gain and is subject to the ordinary income rate.
• If you retained them for more than a year, usually, the gain made is a long-term capital gain, so it will be subject to the tax rates corresponding to long-term capital gains.

For short-term capital gains or ordinary income earned through cryptocurrency activities, you should use this table to calculate taxes on your capital gains:2021 Short-Term Capital Gains Tax Rates10 %12 %22 %24 %32 %35 %37 %Marital StatusTaxible IncomeSother/aUp to $9,950From $9,951 to $40,525From $40,526 to $86,375From $86,376 to $164,925From $164,926 to $209,425From $209,425 to $523,600More than $526,600Head familyUp to $14,200From $14,201 to $54,200From $54,201 to $86,350From $86,351 to $164,900From $164,901 to $209,400From $209,401 to $523,600More than $523,600Season filing jointlyUp to $19,900From $19,901 to $81,050From $81,051 to $172,750From $172,72,000 751 to $329,850From $329,851 to $418,850From $418,851 to $628,300More than $628,300Season filing separatelyTo $9,950From $9,951 to $40,525From $40,526 to $86,375From $86,376 to $164,925From $164,926 to $209,425From $209,426 to $314,150More $314,150

If you retained cryptocurrency for more than a year, use the table below to calculate your long-term capital gains. 2021 Long-Term Capital Gains Tax RatesTax0 %15%20%Marital StatusTaxable IncomeSunte/aUp to $40,400From $40,401 to $445,850More Than $445,850FamilyMother Than $54,100From $54,101 to $473,750More Than $473,750Season Filing JointlyUp to $80,800From $80,801 to $501,600More Than $501,600Seass filing separatelyUp to $40,400From $40,401 to $250,800More than $250,800

How you report cryptocurrency on your tax return depends on how you obtained and used it.

You can also earn income from cryptocurrency activities. They are treated as ordinary income and are taxed at the marginal tax rate, which could be between 10% and 37%. How to Calculate Capital Gains on Cryptocurrencies

When you buy and sell capital assets, profits and losses are classified into two classes: long-term and short-term. The IRS’s treatment of these two classes is very different in terms of the consequences you’ll face.

To calculate your profit or loss, the first thing you need to do is determine the cost basis of the good. It’s usually the price you paid, which is adjusted (reduced) based on the fees or commissions you’ve paid to participate in the transaction. This final cost is called the adjusted cost basis.

You then determine the amount of the sale and adjust (reduce it) based on the fees or commissions you paid to make the transaction.

Finally, you subtract the adjusted cost base from the adjusted amount of the sale in order to determine the difference, which gives you a capital gain if the amount exceeds the adjusted cost base or a capital loss if it is less than this. Buying or selling cryptocurrencies as an investment

The purchase of cryptocurrencies is not a taxable event in itself. You can choose to buy and hold cryptocurrencies for as long as you want without having to pay taxes, even if the value of your situation increases.

You must pay taxes when you sell, trade, or dispose of your cryptocurrency investments in some way that you must recognize a profit in your taxable accounts. This does not apply if you trade cryptocurrencies on a tax-deferred or tax-free account, such as an individual retirement account (IRA).

For example, if you buy Bitcoin worth $1,000 and then sell it for $1,200, you’ll have to report that $200 profit on your tax return. The gain, whether it’s a short-term or long-term capital gain, will depend on how long you’ve held the cryptocurrency.

If, instead, you sold the $1,000 of Bitcoin at $800, you will recognize a loss that can offset other gains and up to $3,000 of your taxable income per year. Any unused loss can be carried over to future years as compensation for future earnings or up to $3,000 of your taxable income per year. If you mine cryptocurrency

Cryptocurrency mining refers to the resolution of cryptographic hash functions to validate and add cryptocurrency transactions to a blockchain. In exchange for this work, miners receive cryptocurrencies as a reward.

If you earn cryptocurrencies through mining, the proceeds are considered taxable income and could be reported on Form 1099-NEC at the fair market value of the cryptocurrencies on the day you received them. You have to report it even if you don’t receive a Form 1099, as the IRS considers it taxable income. If you receive cryptocurrencies as payment for goods or services