Cryptocurrency, often known as crypto, has evolved from a novel notion to a class of assets that a growing number of Americans are considering trading or investing in. This lesson will cover the Internal Revenue Service’s (IRS) treatment of cryptocurrencies, the definition of the crypto capital gains tax, a list of events that trigger this kind of tax, and a summary of best practices.

In 2021, around 13 per cent of United States residents will have participated in cryptocurrency trading (such as Bitcoin or Ethereum) in the previous year. Similar to trading in stocks or other asset types, trading in cryptocurrencies may result in taxable events. Among these taxes is the tax on capital gains from bitcoin trades. Nonetheless, this specific tax does not apply to every bitcoin transaction you do.

What Is Cryptocurrency’s Capital Gains Tax?

When a property is sold for a profit, a tax known as the capital gains tax applies.

For example, if you purchased stock for $50,000 and sold it for $60,000, you would realise a $10,000 profit. This transaction resulted in a capital gain of $10,000, which is subject to taxes. On this $10,000, you would be obligated to pay any applicable capital gains taxes.

The capital gains tax applies to a wide array of objects regarded to be assets. These include equities, homes, pieces of art, and cryptocurrencies, among other things.

The statement indicating that cryptocurrency capital gains are liable to taxes is known as the crypto capital gains tax. When you sell a cryptocurrency for a profit, you must pay the crypto capital gains tax, often known as the capital gains tax.

Answering 10 Burning Questions Related to Cryptocurrency Capital Gains Tax https://t.co/ARrmcYfh0U #Cryptocurrency

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How do I calculate crypto capital gains?

The first stage in establishing whether you are required to pay tax on capital gains is to determine if you have capital gains. You may incur a capital gain or loss based on the difference between the price at which you purchased your bitcoin (also referred to as the cost basis or cost base) and the selling price.

Consider that any charges linked with the procurement of the cryptocurrency may be included in your cost basis estimate. You should choose the price at which you will sell your bitcoin based on its market value at the time you acquired it.

The capital gain or loss is the difference between the selling price (the asset’s fair market value) and the cost basis (which includes all charges). Let’s examine this from a different perspective.

Capital gains – When you sell cryptocurrencies at a higher price than when you acquired them, you have realised a capital gain. You are liable for paying tax on crypto capital gains in this circumstance.

Capital loss – When bitcoin is sold at a price that is lower than its acquisition price, a capital loss happens. In this situation, you are excused from paying tax on your realised capital gains.

What happens to my capital gains tax if I engage in many cryptocurrency transactions?

When you have many Bitcoin sales, you may use a capital loss to offset any potential capital gains.

Let’s combine the two previously presented examples of transactions:

Transaction 1: $12,000 – $10,000 Equals $2,000 capital gains

Transaction 2: $1,200 – $1,000 = $200 capital losses

Net capital gains: $2,000 – $200 = $1,800

If you merged the trades, your total capital gains tax burden would drop to $1,800.

What Are the Various Forms of Cryptocurrency Capital Gains Taxes?

The two types of capital gains taxes applicable to cryptocurrency investments are short-term capital gain taxes and long-term capital gain taxes.

The amount of time you have bitcoin in your hands impacts your rate of gain:

When selling bitcoin after less than a year of ownership, you are liable to a crypto short-term capital gains tax (365 days and under). When you sell bitcoin after one year, your long-term capital gains are liable to taxation (366 days and above).

Taxes on cryptocurrency gain from the selling of short-term assets.

When you sell a bitcoin asset you’ve owned for less than a year, you are subject to the regulations regulating short-term capital gains or losses.

Your reported income and tax filing status will determine the tax rate applicable to gains generated in a short period from cryptocurrencies (e.g., a single filer, joint filer). Individuals filing separate returns often pay a higher tax rate on short-term capital gains than married couples submitting joint returns.

In 2022, the tax on bitcoin gains of fewer than 365 days will range from 10 per cent to 37 per cent.

State-by-state taxes on income from short-term investments vary. You should get further information about this topic from your state’s tax department.

Taxes on the capital gains made by cryptocurrencies over the long run

Sales of cryptocurrencies held for 366 days or more qualify for the favourable long-term capital gains tax rate. The Internal Revenue Service taxes income earned over a longer period at a more reasonable rate.

Your stated income and tax filing status also factor into the determination of the tax rate applicable to long-term bitcoin gains.

In 2022, the long-term capital gains tax rates for cryptocurrencies will range from 0% to 20%.

If your adjusted income is less than the threshold amount, you are excused from paying bitcoin taxes on capital gains. Taxes on long-term capital gains vary from state to state. You should get further information about this topic from your state’s tax department.

One example of the long- and short-term capital gains taxes

Consider that you filed taxes as a single person in 2022 with a total adjusted income of $72,000.

Two years ago, you spent $300 to purchase Ethereum. This year, you decided to sell it for $1,000, a huge rise from the amount you paid. You have realised a $700 gain on your long-term capital.

The tax rate applied to your gains from the sale of long-term assets is 15%. In 2022, you would owe $105 in bitcoin capital gains tax ($700 times by 15% is $105 total). The tax rate that applies if you have held the cryptocurrency for more than 365 days is 15%, which is lower than the tax rate that applies if you have held the cryptocurrency for less than 365 days (22 per cent).

What Are Taxable Events That Trigger a Capital Gains Tax on Cryptocurrency?

The filing of a crypto capital gains tax is not required for every bitcoin transaction. The purchase of bitcoin using fiat cash, for example, is not a taxable event. You will not be obliged to pay bitcoin capital gains tax so long as you hold on to the cryptocurrency and do not sell it.

The circumstances listed below result in the application of capital gains taxes on cryptocurrencies:

• The exchange of cryptocurrencies for conventional currencies (often referred to as “fiat”) for cash.
• The acceptance of cryptocurrency as payment for goods or services (e.g., buying a pizza with Bitcoin, paying a freelance graphic designer with Ethereum).
• The act of exchanging one cryptocurrency for another of a different kind (e.g., buying Bitcoin cash with Dogecoin)

The circumstances listed below do not result in the payment of bitcoin capital gains tax.

• The purchase of bitcoin using fiat currency (cash)
• The acceptance of cryptocurrencies as payment for the sale of products or the rendering of services.
• Donating bitcoin to organisations that are authorised to accept it

Do I owe capital gains taxes on crypto assets gifted to my children?

Les dons de cryptocurrencies de moins de $15,000 to your children are excluded from gift taxes. Beginning in 2022, bitcoin donations will be eligible for a tax deduction of up to $15,000. Only if you or your child sell the bitcoin will the cryptocurrency capital gains tax become payable.

Should I consider adding cryptocurrency to my children’s investing accounts?

Including cryptocurrency in your child’s financial strategy is a good idea, that’s for sure. Including cryptocurrencies in your child’s financial portfolio, such as Bitcoin and Ethereum, is one way to broaden their exposure to many types of assets and better prepare them for the economy of the future.

Is There Any Other Tax on Crypto?

Yes, there are extra cryptocurrency taxes in addition to the capital gains tax on bitcoin.

Since 2021, the Internal Revenue Service (IRS) is curious as to whether or not you have participated in cryptocurrency (crypto) transactions. The following actions will result in tax obligation at the relevant rate for you in 2022. (This does not represent accounting advice, nor are we professional experts in the subject. Consult your tax professional for more details).

Accepting bitcoin as payment for goods or services rendered

Even though you will not be required to pay tax on bitcoin capital gains if you are paid in cryptocurrency, you must still include such payments as income on your tax return. To determine the value of your cryptocurrency, you would examine its open market price at the time of the transaction.

Receiving interest from a lender using decentralised funding (Defi lender)

When you deposit funds into a savings account at some banks and other financial institutions, you may be eligible for interest payments. These alternative kinds of savings accounts provide a higher rate of return on deposits than those given by conventional banking organisations.

Because these financial institutions trade and invest in cryptographic currencies, they can provide more competitive interest rates. However, the remainder of your money will be invested in cryptocurrency. In most circumstances, you should report this interest income under the heading “Interest income” on your tax return.

Cryptocurrency earnings from staking and liquidity pools

Staking refers to the practice of producing income from bitcoin assets without selling them. In contrast to the last scenario, in this one, you will directly use the bitcoin assets you currently own. You must include the interest payments you get from staking in your disclosure of total interest income.

Earning cryptocurrency via mining

Mining is the process of making new cryptocurrencies by verifying transactions that have already taken place. Miners are rewarded with cryptocurrency in exchange for the resources they use. Getting money from mining cryptocurrencies is taxed the same way as getting money from other sources.

Best Ways to Handle Capital Gains Tax on Cryptocurrency

If you utilise or want to use bitcoin transactions in the future, you must have a game plan. To be successful with the cryptocurrency capital gains tax, you must maintain reliable records.

Let’s examine a few of the best practices available:

• Include transactions using cryptocurrencies on your tax return. Since 2021, the Internal Revenue Service (IRS) has required taxpayers to respond to a question about cryptocurrency transactions on Form 1040. The Internal Revenue Service (IRS) may consider it a form of tax evasion if you fail to declare any bitcoin transactions on your tax return. Depending on a variety of factors, the understatement penalty might range from 20% to 75% of the original price.
• Collect information whenever feasible: When you have more than 200 transactions and more than $20,000 in trading on a cryptocurrency exchange in a given year, you are often issued a 1099-K. Specified exchanges may issue you a Form 1099-B when you sell cryptocurrencies for more over a certain threshold. It is more likely than likely,that some exchangers will not give you any tax documentation.
• Retaining records of all of your transactions and regularly reconciling these records is a recognised best practice. Additionally, the majority of exchanges will supply you with a digital copy of your transaction records. Typically, this transaction record is stored in a CSV or Excel file. Use this transaction record to reconcile it with your record of bitcoin transactions.
• Profit from the chance to capture tax losses: Remember that you may wipe out investment returns by balancing them with losses. If you expect to realise a substantial capital gain at the end of the year, you may decrease your taxable gain by selling a portion of your cryptocurrencies at a loss.
• Keep in mind that the tax on gains from long-term investments is lower: Aim to hold onto any cryptocurrency you possess for at least 366 days before selling. The rate applicable to short-term gains is greater than the rate applicable to long-term earnings.
• Discuss the bitcoin capital gains tax with your tax professional and familiarise yourself with IRS Form 8949.

Conclusion

As a relatively young asset class, cryptocurrencies are constantly undergoing development and are very subject to price fluctuations. Because more and more people in the United States are using bitcoin and other cryptocurrencies, you should seriously consider allocating some of your investment capital to such assets. Not only is investing in cryptocurrency a viable choice for diversifying your portfolio, but it may also help you better prepare your children for the economy of the future.