Cryptocurrency has become more and more popular in recent years, as people have become more interested in technology and its potential to revolutionize the way we do business. However, with this increased interest comes the need to understand how cryptocurrency is taxed. In the US, cryptocurrency tax rates vary depending on how and when you use it. Let’s break down these different tax scenarios so that you can better plan your finances accordingly.
Taxable Events
The Internal Revenue Service (IRS) considers any transaction involving cryptocurrency to be a taxable event. This means that if you buy or sell cryptocurrency, or exchange it for goods and services, you are responsible for reporting it on your taxes. The IRS also considers any income from mining activities to be taxable income. Depending on your income level, the rate of taxation will vary; however, all transactions involving cryptocurrency must be reported to the IRS regardless of the amount involved.
Short-Term vs Long-Term Gains
When calculating taxes for cryptocurrency transactions, it is important to consider whether they are short-term or long-term gains. Short-term gains apply if you have held a digital asset for less than one year before selling or exchanging it; in this case, the gain is taxed at regular income tax rates (which can range from 10% up to 37%). If you hold a digital asset for longer than one year before selling or exchanging it, then any gain is considered a long-term capital gain; this type of gain is taxed at lower rates (up to 20%, depending on your filing status).
Crypto Losses
It's not all bad news when it comes to cryptocurrency taxes; losses can also be used as deductions when filing your taxes. Any losses incurred due to buying and selling digital assets can be used as deductions against other types of capital gains. For example, if you had $10K in capital gains from investments but also had $5K in losses due to buying/selling digital assets, then only $5K would be subject to taxation (rather than the full $10K). This can help reduce your overall tax burden significantly if done properly.
Another way to lessen the burden of cryptocurrency taxes is by using Ledgible, a cryptocurrency tax and enterprise accounting platform explicitly designed for tax professionals, CPAs, accountants, and enterprise applications. Ledgible Tax Pro makes tax preparation easier than ever by allowing clients to connect with exchanges and wallets, making collecting information and analyzing it for taxable transactions quick and simple. The organized data is sorted by cryptocurrency, so there’s no need to worry about spending hours poring over an assortment of figures. With Ledgible, tax professionals can ensure that their clients’ crypto transactions are properly accounted for come tax season.
Cryptocurrency may seem complicated when it comes time to file taxes but with a solid understanding of how these transactions are treated by the IRS and how they fit into other aspects of your financial life such as capital gains and losses, navigating crypto taxation doesn't have to be intimidating! With proper planning and research, you can ensure that your crypto transactions are properly accounted for come tax season.
