How Much Tax Do I Pay On Crypto? Cryptocurrency Tax Calculator
While the current crypto market is as volatile as it’s ever been, there’s no denying the fact that a good number of people have become rich from cryptocurrency transactions. Depending on when you traded your Bitcoins or any other type of cryptocurrency, this income could be significant – running into the tens of thousands of dollars. This is especially true considering the incredible run leading cryptocurrencies like Bitcoin have been on over the past couple of years.
Granted, the price of Bitcoin has taken a slight dip lately to stand at over $38,000. However, over this year alone, it’s soared to heights of $41,000 plus. This is an impossibly far cry from its $0.06 value back in 2010. Investors who held on to their Bitcoins over that decade have now seen extreme profits as far as capital gains are concerned.
However, there is always some kind of tax attached to such capital gains. Learning what you owe the IRS and how taxes for cryptocurrencies work is the key to not only paying your fair share but maybe even finding out how you can keep more of your money. This is where a cryptocurrency tax calculator comes in handy.
Do You Owe Taxes on Cryptocurrency Trades?
The simple answer to this question is: Yes. The IRS is very clear on this issue. If you are dealing in virtual currencies such as Bitcoin, you could owe taxes in the form of capital gains tax. This happens if you buy and sell these virtual currencies for a profit. This rule stands whether or not you exchange your cryptocurrencies for actual money or other forms of cryptocurrencies and make a profit.
What Are the Tax Rules for Buying and Selling Cryptocurrencies?
In IRS Revenue Ruling 2014-21 and 2019-24, the tax collector gives guidance on this crypto tax issue. The body categorically states that cryptocurrencies are treated as property and not currency. This means that any crypto-trading profits realized will be treated similarly to stock-trading profits, also categorized as property.
The issue here isn’t that cryptocurrencies are treated as property or in the same way as stock-trading profits; that would be straightforward enough. The main complication is that cryptocurrencies such as Bitcoin can not only be bought for other Bitcoins but can also be exchanged for other goods such as pizza, formerly a Tesla, or even withdrawn from a Bitcoin ATM in the form of cash. These kinds of exchanges aren’t very common in stock trading, and that’s why crypto taxation is a rather confounding issue.
Short Term Capital Gain and Long Term Capital Gain for Crypto Assets
Since cryptocurrency is treated as an asset by the IRS, it goes to reason that you should look at your virtual coins as capital assets. This means that you have to track its value when you buy it and its value when you sell or exchange it.
Say, for example, you bought your Bitcoins at $20,000 and sold or exchanged them for $40,000. You will have earned or gained $20,000 in the transaction. This income from your crypto trades is subject to taxation on a long-term capital gains basis or short-term capital gains, depending on how long you held the coins before trading.
If, for example, you held the coins for over a year, you will get what is referred to as preferred long-term capital gains tax rates, which fall anywhere between 0-20%.
- It’s 0% for low and middle-income earners who make less than $40,000 ($80,000 for couples).
- It falls at 15% for middle-income and high-income earners, making up to $441,000 ($449,000 for couples).
- 20% for high-income earners making more than $441,000 ($449,000 for couples).
If, however, you only held the coins for less than a year, then your tax liability falls under the short-term capital-gains rates, which are between 0-37% depending on your modified, adjusted gross income.
What About When You Exchange One Virtual Currency for Another?
If you exchange one cryptocurrency for another and earn a profit, you accrue a taxable gain. Say, for example, you bought your Bitcoins at $20,000 and exchanged them for Ethereum, worth about $50,000 later. That $30,000 gain is taxable regardless of how long the cryptocurrency transaction took. Whether you held the Bitcoins for years or just a few minutes, you owe tax on the gains.
What About Exchanging Virtual Currency for Goods and Services?
More and more businesses are accepting cryptocurrency exchanges as a form of transaction now. In this case, you will be taxed on the increase in value of the virtual currency you hold from the time you bought it to the time you use it to buy any goods and services.
Say, for example, you used $100,000 worth of Bitcoins to buy something online. To find out how much tax you owe, you would have to whip out your cryptocurrency tax calculator and track the currencies used from the moment you bought them to when you used them in the purchase. That difference is what will be taxed.
If you bought those coins at $20,000 and are now worth the $100,000 you used to purchase your goods and services online, then the $80,000 gain is the taxable income.
In this case, the rate of taxation will fall under the long-term capital gains or short-term capital gains rates depending on how long you held the coins before using them for your online transaction.
What About When You Make a Loss?
If the recent market shake-up by Elon Musk and the Chinese government are anything to go by, you know that the crypto market is volatile, and losses are a big part of such a system. So what happens when you make a loss when dealing in virtual currency?
In this case, you will be entitled to a tax loss. It’s important to note that losses made in cryptocurrency exchanges can be used to offset crypto gains made in other transactions. This holds true whether you are using your cryptocurrency gains to buy goods and services or exchange them for other virtual currencies.
Your short-term virtual currency losses can be used to offset your short-term crypto losses, just as your long-term cryptocurrency gains can be used to offset long-term cryptocurrency losses.
Do You Pay Taxes on Crypto Mining?
The IRS considers cryptocurrency mining and staking income as ordinary income and are therefore taxed accordingly. In short, the IRS considers these kinds of income quite similar to receiving a regular paycheck for performing a service or doing a job.
In this case, your tax calculations should only factor in the value of the virtual currency when you earn it for the mining and staking services provided as opposed to for how much it’s worth now.
Should you, however, sell the cryptocurrency you earn at a later date for a profit, then you will pay capital gains tax on the increase in value.
For example, if you received the crypto payment when the coins were worth $1,000, and you waited until they were worth $1,500 before using them or exchanging them, then you owe capital gains tax on the extra $500 depending on how long you held the coins.
As you can see, keeping a meticulous record of your virtual currency transactions is essential for taxation purposes. Bitcoin tax or crypto taxation might not be as straightforward as other forms of taxation, such as income tax, but they are fairly easy to manage using a tax professional.
What is clear is that every crypto investor either owes some kind of crypto tax or is entitled to some kind of tax loss depending on the cryptocurrency transactions in question.