Cryptocurrency continues to be the talk of the town, with the whole world watching the increasing price of Bitcoin as it hit its highest ever price twice this year. In October 2021, its price reached $64,000.
As of October 2021, the total crypto market cap reached $2.6 Trillion. With such an increase in adoption, it’s important to understand how cryptocurrency is taxed so that they can better manage their wealth.
Here in this article, we have discussed everything you need to know about how cryptocurrency is taxed.
What is Cryptocurrency?
Cryptocurrency is a virtual currency that does not depend on intermediaries such as banks. Instead, it utilizes blockchain ledger technology to store and verify transactions.
The ledger is secured using strong cryptography. Cryptocurrency is designed as the medium of exchange.
Many different types of cryptocurrencies are available globally, such as Ethereum, Dogecoin, Cardano, Aave, etc.
How is Cryptocurrency taxed?
Many people believe that the government does not back cryptocurrency; therefore, it does not involve taxation. However, that is not true. In the United States, cryptocurrency is taxed almost the same way as traditional assets.
Crypto exchanges report user activity on gains and losses to IRS (Internal Revenue Service) because the IRS treats cryptocurrency as a capital asset which one must pay tax on gains and losses.
How to calculate tax on your Cryptocurrency
Tax on cryptos depends on various factors such as:
Capital gains: When you sell crypto, and its price exceeds the original cost.
Capital loss: When you sell crypto, and its price is less than the original price.
Duration: The length of time you held the assets. The time duration of holding assets determines the gains or losses as “short term” or “long term” and are subjected to tax differently.
Short-term capital gains or losses: If you buy a Cryptocurrency and sell within 365 days, it is considered a short-term gain if the cryptocurrency made a profit.
According to IRS, the Short Term Capital Gain Tax on Cryptocurrency profits is 10% to 37% in 2021.
|
Tax Rate |
Single | Married |
Head of Household |
|
10% |
$0 – $9950 | $0 – $19,900 | $0 – $14,200 |
|
12% |
$9951 – $40,525 |
$19,901 – $81,050
|
$14,201 – $54,200
|
|
22% |
$40,526 – $86,375 |
$81,051 – $172,750
|
$54,201 – $86,350 |
|
24% |
$86,376 – $164,925 | $172,751 – $329,850 |
$86,351 – $164,900
|
| 32% | $164,926 – $209,425 | $329,851 – $418,850 |
$164,901 – $209,400 |
|
35% |
$209,426 – $523,600 | $418,851 – $628,300 | $209,401 – $523,600 |
| 37% | $523,601 or more | $628,301 – more |
$523,601 – more |
Long-term capital gains or losses
If you own a crypto asset and sell it after one year, the difference between the sale price and purchase price determines long-term capital gain or loss. Long Term Capital Gains are 0% to 20%, which depends on your income.
The chart below shows how cryptocurrency profits (Long Term Capital Gains) are taxed when held for more than a year.
|
Tax Rate |
Single | Married |
Head of Household |
|
0% |
$0 – $40,400 | $0 – $80,800 | $0 – $54,100 |
| 15% | $40,401 – $445,850 |
$80,801 – $501,600
|
$54,101 – $473,750
|
|
20% |
$445,851 – more |
$501,601 – more
|
$473,751 – more |
The Bottom Line
The taxation of cryptocurrency is not as simple as it seems. Cryptocurrencies are highly volatile, therefore, challenging to determine tax. However, crypto gifts below $15,000 do not involve taxation but are subject to capital gain tax if you sell the gift. Inherited cryptos are also subject to tax like other assets.
Its also important to stress that not reporting your Bitcoin earning is considered tax evasion by the IRS, and you have to pay the penalty if you don’t pay the tax after the deficiency notice from the IRS.
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