What You Should Know About Crypto and Taxes 

Jenny Handwerk |

What You Should Know About Crypto and Taxes 

The popularity of cryptocurrencies has skyrocketed in recent years. Whether you accept or pay with cryptocurrency, have invested in it, are an experienced currency trader, or received a modest amount as a gift, understanding bitcoin tax consequences is critical.

Although many people invest in cryptocurrencies in the same way they do in stocks, the term cryptocurrency refers to a digital asset that may be used to buy products and services. Part of its allure stems that it is a decentralized medium of exchange, which means it functions independently of banks, financial institutions, or other central authorities like governments.

It's not the most interesting aspect of crypto investment, but if you do decide to invest in a digital currency, you need to understand how crypto taxes operate. Even though cryptocurrencies are still relatively new, the IRS is working hard to ensure crypto tax compliance.

How does the IRS define cryptocurrency?

In recent years, the IRS has increased its examination of bitcoin and other digital currency transactions, and this trend is expected to continue this year and beyond. The government closely monitors the tax implications of dealing in digital currencies, particularly non-fungible tokens (NFTs).  

The IRS 1040 Form Instructions provide the following description of cryptocurrency, which is "digital assets" overall. The IRS considers  cryptocurrencies to be property, meaning that sales are subject to capital gains tax restrictions. However, keep in mind that purchasing something with Bitcoin qualifies as a sale because you're effectively selling a piece of your holdings to fund the cost of the purchase. 

How is cryptocurrency taxed?

You will experience capital gains or losses if you acquire, trade, or exchange cryptocurrency in a non-retirement account. Your gain or loss, like other investments taxed by the IRS, may be short-term or long-term, depending on how long you kept the cryptocurrency before selling or exchanging it.

Suppose you owned the cryptocurrency for a year or less before spending or selling it. In that case, any profits are considered short-term capital gains and should be taxed at your ordinary income rate.
If you kept the cryptocurrency for more than a year, profits are oftenly considered long-term capital gains and should be taxed at long-term capital gains rates.

How Much Crypto Tax Do I Owe?

The amount you owe in taxes will be on whether you sell or earn cryptocurrencies. When you sell cryptocurrency and achieve a profit, you may owe either regular income taxes or capital gains taxes, depending on how much time you kept the cryptocurrency. If you owned it for one year or less, you will be subject to the higher, usual tax rates.

If you earn bitcoin by mining it or get it as part of a promotion or payment for services, it is taxable at your ordinary income tax rate.

Furthermore, if you keep bitcoin from these activities and later spend or sell it for more than the amount you obtained, you'll face short or long term capital gains taxes on the profits, according on how long you hold the crypto.

Every time you trade cryptocurrencies, you must note how much money you made or lost in US dollars. In this manner, you can accurately report your cryptocurrency gains and losses. If you prefer to keep things simple, cryptocurrency stocks may make it easier to track gains and losses than purchasing and selling single currencies.

Tax forms issued by cryptocurrency exchanges

A cryptocurrency exchange may provide its users with Forms 1099-MISC, 1099-B, and 1099-K. Taxpayers must always record any income, gains, and losses related to digital assets on their annual income tax return, regardless of whether any of the forms listed below are provided.

Ordinary income tax based on your income tax bracket is reported on Form 1099-MISC. Information for several income payments and additional money obtained through a centralized cryptocurrency exchange is provided by this form.

The IRS is notified of the sale of taxpayer capital assets through Form 1099-B. Customers of traditional financial brokerages receive 1099-B Forms from them. However, bitcoin exchanges were not previously compelled to comply with this requirement. 

Anyone using cryptocurrencies, including NFTs, ought to be conscious of the tax ramifications of their conduct. The IRS keeps a close eye on these transactions and tracks those who participate in them using Form 1040 and other tools.