Yes, cryptocurrencies are taxed. Cryptocurrencies, such as Bitcoin, are seen as a type of property by the Internal Revenue Service (IRS) for United States taxpayers. As such, general tax principles that apply to property transactions also apply to transactions using cryptocurrencies.
When it comes to taxes, the two main types of transactions involving cryptocurrency you need to be aware of are purchases and sales, with each having different consequences and reporting requirements when filing your taxes. Here, we’ll break down what you need to know and how these transactions can affect your taxes.
If you purchase a cryptocurrency, you won’t owe any taxes on the transaction at that time. That’s because no taxable event has taken place yet. However, when you decide to sell, trade, or otherwise dispose of your cryptocurrency, you’ll need to report it on your taxes. This is where gains, losses, and taxable events come into play.
When it comes to cryptocurrency tax purposes, there are two types of gains: short-term and long-term. Short-term gains occur when you hold your cryptocurrency for a year or less before selling it, while long-term gains occur when you hold your cryptocurrency for more than one year before selling. The short-term gains are taxed as ordinary income, while long-term capital gains are taxed at lower rates.
If you have a loss, you’ll need to report it so that you can deduct it from your other sources of income. You can only deduct up to $3,000 in capital losses each year, but if your losses are more than that, you can carry the excess over to the following year.
In addition to filing taxes when you sell cryptocurrency, you may also be responsible for reporting income related to cryptocurrency through employment, mining, staking, or creating new tokens. These activities count as taxable income and will generally require you to report them on your income tax return.
It’s important to note that cryptocurrencies are not treated the same as foreign currency, which means you are not exempt from taxes if you make a profit from foreign exchange trading using cryptocurrencies.
Taxpayers also need to be aware of the possibility of fraud or theft from their cryptocurrency wallets. If your wallet is hacked or you are the victim of a scam, you must report the incident to the IRS and take steps to protect your identity.
Ultimately, it’s important to understand your responsibilities when it comes to cryptocurrency taxation. If you choose to buy, sell, or otherwise transact with cryptocurrency, it’s wise to discuss your situation with a qualified tax professional who can help you navigate the complex world of cryptocurrency taxation.