The answer to this is definitely, yes! There was a period of time when the word "currency" was very confusing. People were hoping that these coins would get treated like actual currencies; you don't pay any taxes when you exchange dollars for dollars. But that is not the case when it comes to crypto. Here's how it's taxed...
The answer to this is definitely, yes!
There was a period of time when the word "currency" was very confusing. People were hoping that these coins would get treated like actual currencies; you don't pay any taxes when you exchange dollars for dollars. But that is not the case when it comes to crypto.
The IRS has been extremely clear that there'll be treating cryptocurrencies at large as a personal property. What does this mean?
Personal property is stuff you're used to, such as stocks, bonds, and your house or car. When you purchase these things, they have a cost basis, which is the amount you paid for them. So very important that we know how much you paid for your cryptocurrency.
When you then sell any personal property you pay taxes in the form of capital gains on the difference.
So, let's say you bought your Bitcoin at $10,000. You have one Bitcoin. You sell it a year later for $20,000. You sold it for the full fair market value of $20,000. That means you made 10,000 of cash from the Bitcoin you sold. $20,000 - $10,000 (cost basis) = $10,000 gain (capital gain). So you see, this will create a $10,000 capital gain.
Much like a stock or a bond, you're going to be subjected to short or long-term capital gains rates, depending on how long you hold the crypto asset. If you hold it for under a year, it'll be short-term capital gains generally taxed at your income tax rate, though some state taxes are different. If you hold it for 365 plus one day, you're going to get long-term capital gains rates.
Long Term Capital Gains Rates are generally more favorable, though again, many states differ in how they treat long-term versus short-term capital gains at a federal level. This means instead of income tax rates, you're going to be paying a lower capital gains tax rate of 15 or 20%, depending on your tax brackets.
There are a whole lot of really complicated crypto transactions out there. But the most important thing for you to understand is that when you take your crypto and sell it or trade it for another crypto, you're immediately entering a taxable event. You need to mark that down that transaction.
You need to hire a tax firm like us to help you determine what your taxes will be for those transactions. These are all things we can come up with. We can put them into the appropriate software. You can do your taxes correctly, but you do owe taxes. I hope this is helpful.
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