What is the Cryptocurrency Tax Rate?
Cryptocurrency has skyrocketed in popularity in the last several years, and so too has the IRS's scrutiny on making sure that they get paid their fair share of that tax revenue from crypto transactions. Since cryptocurrency is such a new asset class, and is at its core, very different from traditional financial products, how are gains on the digital assets taxed? What are the tax rates for cryptocurrency?
Understanding how cryptocurrency is taxed
When you buy cryptocurrencies from an exchange, they're classified as being on hand. When you sell them to someone else, they're considered to be on sale. This means that you pay taxes on the transaction, but not when it's sitting in your account. If a cryptocurrency gets mined, the person who did the mining will have to report it on their taxes whether they sell it or not.
As far as gains are concerned on the cryptocurrencies or digital assets you do sell, the IRS in the United States recognizes cryptocurrency as property, not currency.
The general rule of thumb is that when you sell or use cryptocurrency to do something (exchange it for goods and services, use it to pay for a good or service) you will incur the capital gains tax.
When you buy something with cryptocurrency, you are trading one type of virtual money for another-not purchasing goods or services. You must report this on your taxes as a sale, so it's considered income.
It's also possible to be taxed twice on selling your bitcoin if you also spend them on goods and services-once when they're converted into dollars and again when they're spent at a retailer.
What are the Capital Gains tax rates?
Since crypto gains are taxed at the standard capital gains tax rates, how much can you be expected to pay? The IRS has a variety of tax rates for different types of capital gains. Short-term capital gains are taxed as regular income, which can be as high as 39.6%. If the asset is sold after being owned for over one year, then the long-term capital gains rate is applied. This ranges from 0% to 20% based on the amount sold. There are also other factors that affect this rate such as whether any dividends were received from owning the stock.
However, if you don't want to pay capital gains on your cryptocurrencies, then you can also offset your gains by harvesting your losses. For losses on cryptocurrency, you can subtract them from your gains directly. So, if you made $20,000 on the sale of one type of cryptocurrency, but lost $20,000 on another, your net capital gains would be $0, meaning you wouldn't owe any taxes on that particular set of investments.
Are there any other special scenarios?
There may be some special things to consider when determining your cryptocurrency tax burden. All of these scenarios can be complex and confusing to the untrained eye. Luckily, the Ledgible Crypto Tax Platform offers up a fully integrated, independently audited crypto tax software solution for both crypto traders and professional tax advisors so you don't miss anything in the crypto tax process.