Cryptocurrencies are confusing on a lot of levels. But crypto taxes are now!
Ask people on the street how they work and you’ll be surprised at the answers.
It’s no surprise as the blockchain technology that makes them possible is not the easiest thing for a layperson to understand.
And you don’t have to know how it works to buy and sell and invest in Bitcoin.
There is one important thing to know if you do plan to get involved, however. That’s how it affects your taxes.
It’s unclear how to categorize crypto.
Should it be taxed like a currency?
Or, what about gold?
Maybe it should be taxed as a commodity like oil.
Some believe it shouldn’t be taxed at all.
“The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability“.
So, how crypto tax affects your overall taxes?
Though, this is not coming from a tax expert so don’t take this as professional advice about your taxes.
Make sure you contact a tax specialist as many governments are cracking down.
Long term investments
If you plan to buy and sell Bitcoins as a long-term investment, then you’re in luck.
The tax laws are very favorable for this.
In many ways, Crypto tax is similar to taxation on stocks and funds investments-
The IRS technically considers cryptocurrency as property.
So it can be looked at like stocks or real estate.
But, IRS notice 2014-21 indicates cryptocurrency as property, it does not—in the literal sense—refer to it as a stock.
If you hold onto it for more than a year, then it comes under capital gains taxes when you end up selling it.
All the more reason to HODL through any dips and just keep it until it makes a comeback!
As far as Federal taxes go, if you make under $479,000 as a married person or $425,800 for individuals, then you pay only 15%.
More than those totals and you end up paying a flat 20%.
How it compares
It is very good news that this comes under capital gains as you will see that it would end up costing a lot more if it had a different classification.
Gold is considered a collectible and there was a chance that cryptocurrency would fall under the same definition.
If it had then the rate would be a tax of 28%. And it wouldn’t matter how long you held onto it.
Since a currency comes under your income, it is taxed accordingly.
If you are in the upper tax brackets then you can pay up to 37%.
It all depends on how much we are talking about. That percentage is for the highest tax bracket.
This classification is where things get very complicated.
There is a scenario where 60% of any gains are considered long-term capital gains and 40% are considered short-term capital gains.
This could put you in the 26.8% tax bracket.
There is another scenario where you pay taxes on profits from the increase in the value of your cryptocurrency even if you don’t sell.
Crypto tax is surprisingly similar to taxes on stocks.
Looking at the tax rate on commodities it seems like the IRS did a huge favor to those wishing to trade crypto instead of something like oil.