Millions of people have made investments in cryptocurrency. But are the gains tax deductible?
The IRS views cryptocurrency like any other capital asset; when purchasing and selling crypto assets, capital gains taxes could apply depending on how long they were held for. Careful record-keeping is crucial in order to calculate these taxes correctly.
What is a taxable event?
Cryptocurrency is considered a capital asset and, when sold for profit, will be taxed like any other capital asset would. Gains will depend on what was paid and its market value at time of sale; holding your investment for at least 12 months qualifies you for long-term capital gains rates that are significantly lower than income taxes.
Utilizing cryptocurrency to purchase goods or services can also be considered taxable events. For instance, if you purchased Tesla stock with bitcoin and later sold it at a higher value than initially paid would constitute a gain that must be declared and taxed accordingly.
Gifting or receiving cryptocurrency does not incur gift taxes; however, losses due to loss or theft cannot be deducted. Furthermore, any cryptocurrency earned through yield-earning activities like staking is treated as regular taxable income; so for this reason it’s wise to consult a trustworthy tax professional when giving or receiving cryptocurrency as gifts.
How do I report a taxable event?
If you exchange cryptocurrency for another form, or purchase goods and services that appreciate in value using cryptocurrency, and it appreciates in value as you purchased and sold, that constitutes a taxable event; any difference in prices is your taxable profit. This also holds true if you received it as a gift (unless it comes in fiat form, which does not trigger taxes), or were paid through cryptocurrency by your employer.
If you trade cryptocurrency using a taxable account or earn crypto from mining or staking, typically reporting these transactions on Schedule D along with any capital gains or losses during the tax year will usually require. If working as a freelancer or independent contractor and being paid in crypto is part of your work agreement, earnings would typically be reported using Form 8949 instead; it’s essential that you maintain accurate records regarding cost basis to calculate tax events accurately.
How do I avoid a taxable event?
cryptocurrency can trigger taxes in various ways, from trading it for cash or using it as payment on purchases to exchanging or exchanging it at more value than you originally paid for it. But in order to incur a taxable event and incur taxes accordingly, there must be an increase in value from its initial purchase or sale or exchange price to its final price paid or sold at.
Taxes must also be paid when moving cryptocurrency between wallets or accounts you own, which is considered selling by the IRS. You should keep an accurate record of original cost basis to report correctly when selling assets.
Holding crypto for over one year can help you avoid paying taxes on it, since long-term capital gains rates are lower than short-term ones and you can offset gains with losses from other investments. Although managing crypto taxes may take more time and effort than you anticipate, software that connects directly to an exchange and compiles all the relevant information can make life much simpler.
How do I pay taxes on a taxable event?
If you sell or trade cryptocurrency and realize a profit, you must report and pay taxes on that gain. Gains are calculated by subtracting your original cost basis from your selling price – usually the purchase price, although in certain instances this could also include gifts received as gifts, mining gains or stakes staked as gains.
Tracking your cost basis using a cryptocurrency tax calculator or through your crypto exchange/brokerage platform is key for managing tax liability; additionally, any fees incurred during transactions may also be tax deductible.
Contribute some coins as donations or gifts and reduce your tax bill by considering potential federal and state gift and estate taxes before donating or gifting coins. Doing this may avoid capital gains taxes and offset future crypto sales expenses. But be mindful of possible federal and state estate taxes when making transfers of this nature.
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