Cryptocurrency remains the Wild West of the investment landscape. These intangible digital assets swing wildly in value, making engaging with them akin to a virtual rollercoaster ride of financial speculation.
From a tax standpoint, the IRS treats cryptocurrency trades no differently than stock or bond transactions. Whether you trade crypto actively or use it casually, say, to buy your morning joe, staying abreast of the tax implications is crucial. Here’s what you should know.
Yes, Cryptocurrency Is Taxable
Straight to the point: cryptocurrency can indeed be taxable, depending on how you handle it.
The IRS categorizes cryptocurrency as a capital asset, meaning gains are subject to taxes. Besides trading, other activities involving cryptocurrencies can trigger tax liabilities, necessitating detailed reporting during tax filings.
Cryptocurrency Is Taxed as a Capital Gain If You Sell It
Buying and selling crypto flags you for tax dues akin to stock trading. Short-term capital gains tax applies for holding periods under a year, while long-term rates come into play for over a year.
Long-term capital gains tax rates peak at 15%, with rates dropping to 0% for single filers earning $41,675 or less, and $83,350 or less for joint filers. Contrastingly, short-term capital gains are taxed at ordinary income rates.
You’ll Owe Tax If You Use Cryptocurrency To Purchase Something Else
Planning to spend your crypto on a latte or new attire? Be ready to document these transactions meticulously as they are likely taxable. Using crypto for purchases involves converting it to dollars, with the transaction viewed as a crypto sale by the IRS. If the crypto appreciated, expect a taxable gain.
Mined Crypto Is Taxed as Ordinary Income
Crypto mining rewards pay out coins or tokens as compensation for blockchain validation efforts. The IRS deems these rewards taxable income, subjecting miners to ordinary income tax, irrespective of whether they sell the rewarded cryptocurrency. Subsequent selling may trigger capital gains taxes if the asset appreciated.
Buying Crypto With US Dollars Has No Immediate Tax Consequence
Acquiring crypto with fiat currency isn’t a taxable event and need not be reported to tax authorities. There are no immediate taxation implications when purchasing cryptocurrency with US dollars, offering a potential loophole for tax avoidance.