Tax Rules for Crypto Currency

Common crypto activities and how they’re taxed 

• Buying Crypto

Good news for all you crypto holders ! Buying Bitcoin or other cryptocurrencies is itself not a taxable event. You only pay taxes on the purchased cryptocurrency when you dispose it (trading, selling, or using as means to purchase). However, it’s still important to keep track of this activity as it does set your cost-basis when you do dispose of your crypto.

• Selling crypto for fiat money

Selling crypto for fiat currency is taxable as property, meaning any gains will incur a capital gains tax. You will need to report your capital gains and losses on Form IRS 8949. For example, if you buy $2000 of ETH (this is your cost-basis) and later sell it for $2500, you would incur a capital gain of $500.

• Trading crypto for crypto

Trading one coin for another is again taxable as property and will need to be reported on your IRS 8949 form. For instance , let’s say you bought 2 Litecoin for $500 (this is your cost-basis). Later in the year, you traded all of this Litecoin for ETH. When you made this trade, Litecoin had gone up in value and the new value of 2 Litecoin was $750. You would have incurred a capital gain of $250.

It’s important to note that if you were just transferring coins from one exchange or wallet to another, it does not amount to disposal  and is therefore not taxable.

• Using crypto to purchase goods or services

Using crypto as payment for goods and services constitutes a disposal and any gains or losses will need to be reported on Form 8949. Note that this includes any purchases made on cryptocurrency debit cards!

• Mining or staking cryptocurrency

Any crypto earned through mining or staking crypto is taxable as income. Unlike the above examples, any profits here will be subject to ordinary income tax rates and not the capital gains tax rate. The amount taxed will equal the asset’s fair market value at the time the coin is mined(not sold).

Note that if you then sold this crypto, it would trigger a second taxable event and you would be required to report this capital gain or loss on Form 8949.

Taxes inevitably stand among life’s only certainties, and their applicability on cryptocurrency is no exception.

Yes, your Bitcoin is taxable. The IRS considers cryptocurrency holdings to be “property” for tax purposes. It means your virtual currency is taxed in the same way as any other assets you own, like stocks or gold.

For most people who buy and trade crypto via online exchanges, accounting for it in your tax return is relatively easy. But like most things related to digital currency, things can get a lot more complicated when you actively deal in cryptocurrency.

Here’s what you need to know about which activity you might have to report to the IRS, and how you can begin planning ahead for your 2021 taxes

Do you pay taxes on cryptocurrency?

Yes, you must pay taxes on cryptocurrency gains when you dispose of an asset, much like stocks. This could include: selling your crypto for cash, trading one cryptocurrency for another, or using crypto as payment. You could also pay taxes on cryptocurrency earned as income through mining, staking, or getting paid in crypto.

And the IRS is serious about enforcing this regulation. This year, for the first time, the IRS added a new question to Form 1040 that asks taxpayers, “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
If you don’t report your crypto taxes, the IRS can prove intentional disregard for knowingly failing to report your tax details.

However, not every crypto activity receives the same tax treatment—and this is where things can get confusing for crypto investors. To clarify, let’s dive into how cryptocurrency is taxed, and how these tax laws apply to some of the most common crypto activities.

What are the cryptocurrency tax rates?

If you received cryptocurrency as income, it would be taxed at your ordinary income tax rates. However, If you dispose of your cryptocurrency any profits will be taxed at the capital gains tax rate.The tax applicable varies based on how long you hold the asset and your income levels.

If you held crypto for over a year before selling, your capital gains will be taxed at the long-term capital gains rates in the table below.

Alternatively, if you sold crypto after a holding period of less than one year, these gains will be taxed at the short-term capital gains rates. The tax rates are the equivalent of your ordinary income rate as stated in the below table.

Currently, in the United States, individuals are required to file an FBAR if they hold a financial interest in or signature authority over at least one financial account located outside of the US. This requirement is applicable if the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year.

The reporting obligation may exist even if there’s no associated taxable income. If you fail to file an FBAR, you can be shocked with some pretty hefty penalties. The fines go up to $10,000 per violation for non-willful violations and up to $100,000 or 50% of the balance in the account for willful violations.