Crypto Investors: How do you know if you owe tax on your cryptocurrency?

Tax law can easily make your head spin. When you add cryptocurrency to the mix, things can get even more confusing. But it’s important to know how cryptocurrency taxes work to avoid getting in trouble with the IRS.

We’ve listed a few things to consider to help you determine whether you should pay taxes on your cryptocurrency.

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Should You Worry About Crypto Taxes?

Understanding what types of crypto transactions are taxable can be confusing. In general, if you make money with your cryptocurrency, you have to share some of your profits with the IRS. Below are some questions to ask yourself to determine whether you have a taxable event.

  • Did you sell cryptocurrency for a profit in 2022?
  • Have you mined crypto?
  • Have you received cryptocurrency in exchange for goods or services?
  • Have you made purchases with your cryptocurrency?

If you answered yes to the above questions, you most likely have a chargeable event. But let’s say you bought Bitcoin last year, and you’re still clinging to it. If you don’t sell or trade it in any way this year, don’t worry about taxes. It’s a good idea to consult your CPA or tax advisor to learn more about how certain transactions affect your taxes.

What you need to know about crypto taxes

In the eyes of the IRS, cryptocurrencies such as Bitcoin and Ethereum is considered a property type rather than a currency. You will have to pay taxes on crypto just like you do on stocks and other types of real estate. Here are some taxable situations you may encounter:

  • If you are a crypto miner, your crypto is considered taxable income even if you don’t sell it. Your crypto mining taxes are based on the fair market value of the cryptocurrency when you receive it.
  • Selling or trading cryptocurrency creates a taxable event if the realized value of your crypto is greater than what you originally paid.

Your broker or exchange should send you Form 1099 during tax time. This will give you a breakdown of your capital gains and losses so that you can complete IRS Tax Form 8949. If you do not receive a form during tax time, you are still responsible for reporting your crypto transactions to the IRS.

What are the crypto tax brackets?

You have to pay short-term or long-term capital gains tax if you make money with crypto. Your taxes on crypto profits depend on how long you held your crypto before throwing it away.

The rates for short-term capital gains — ranging from 10% to 37% — are the same as the rates you would pay on the income you earn while you work. These short-term crypto tax rates apply to day traders and other investors who sell their cryptocurrency within a year of purchase.

Check out the tax rates below on short-term crypto capital gains before you sell.

Nothing but

Married filing jointly

head of the household

ten%

$0 to $10,275

$0 to $20,550

Up to $14,650

12%

$10,276 to $41,775

$20,551 to $83,550

$14,651 to $55,900

22%

$41,776 to $89,075

$83,551 to $178,150

$55,901 to $89,050

24%

$89,076 to $170,050

$178,151 to $340,100

$89,051 to $170,050

32%

$170,051 to $215,950

$340,101 to $431,900

$170,051 to $215,950

35%

$215,941 to $539,900

$431,901 to $647,850

$215,951 to $539,900

37%

Over $539,900

Over $647.850

Over $539,900

Table source: Author. Data source: Belastingdienst.

Let’s say you bought Bitcoin for $40,000 in January 2022 and it goes to $60,000 in December 2022. If you decide to sell in December, you’ll have a short-term capital gain of $20,000 because you’ve held your crypto for less than a year. year.

You can get around short-term win rates if you hold onto your crypto for more than a year before selling it. The long-term capital gains rates are very attractive, giving you access to preferential tax brackets of 0%, 15% and 20%. A single filer who earns up to $40,400 per year in 2022 can benefit from the 0% capital gains tax rate. If you are married and filing together, you can earn up to $80,800 before paying long-term capital gains tax.

Managing Your Crypto Tax Debt

If you have any cryptocurrency trades during the year, you should talk to your CPA or tax advisor about the potential ramifications. Selling, receiving, exchanging and mining cryptocurrency can all be taxable events. Keep track of all your crypto transactions throughout the year so you don’t face unexpected tax bills later on.

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