Paying Taxes on Cryptocurrency Gains
You absolutely must pay taxes on cryptocurrency gains—most countries, including the United States, heavily tax gains from cryptocurrency transactions. The Internal Revenue Service (IRS) treats cryptocurrency as property for tax purposes, which means that gains or losses from buying, selling, or exchanging crypto are subject to capital gains tax. Understanding how and when taxes apply is crucial to staying compliant and avoiding penalties.
Many cryptocurrency holders are new to the world of property investment. The certified professionals at Phoenix Tax Consultants help these individuals, as well as veteran crypto investors, adhere to the complex laws in this area. Even an unintentional error could result in thousands of dollars in penalties and interest. At Phoenix Tax Consultants, we assist with tax planning to maximize property holdings and minimize tax liability.
How Cryptocurrency is Taxed
When you dispose of cryptocurrency, whether by selling it for fiat currency (such as U.S. dollars), trading it for another cryptocurrency, or using it to purchase goods or services, that transaction creates a taxable event. The IRS treats this event as a capital transaction, tantamount to selling stocks or real estate.
Crypto holders pay tax on the gain, which is the difference between what the amount paid for the crypto (cost basis) and what you received when you disposed of it.
If Sam buys one Bitcoin for $20,000 and later sells it for $30,000, he must pay tax on the $10k capital gain.
Capital Gains: Short-Term vs. Long-Term
Cryptocurrency gains are subject to capital gains tax, the amount of which typically depends on the length of time the owner held the asset before selling.
- Short-Term Capital Gains (crypto held for one year or less) are taxed at your ordinary income tax rate (which can range from 10 % to 37 % in the U.S.).
- Long-Term Capital Gains (held for more than one year) are taxed at lower rates, typically 0 %, 15 %, or 20 %, depending on your income level.
Planning when to sell can significantly impact your tax bill, so it’s essential to track holding periods carefully.
Taxable vs. Non-Taxable Events
Taxable events include selling cryptocurrency for fiat currency, trading one cryptocurrency for another (e.g., ETH for BTC), using cryptocurrency to purchase goods or services, receiving cryptocurrency as payment for goods or services, and earning cryptocurrency through mining, staking, or airdrops. Crypto related to this final taxable event is treated as income for tax purposes.
Every other event, such as transferring crypto between wallets or donating it to a qualified charity, is a non-taxable event.
Crypto as Income
If you earn cryptocurrency through mining, staking rewards, airdrops, or as compensation, it is considered ordinary income, and you must report the fair market value at the time of receipt. This income is taxed at your regular income tax rate and may also be subject to self-employment tax, depending on how you earned it.
Failure to Report Crypto Gains
The IRS has ramped up enforcement and now requires a direct answer to a crypto-related question on Form 1040. Failing to report gains or income from crypto can lead to audits, penalties, or even criminal charges in cases of fraud.
For more information about the tax implications of property dispositions, contact us online or call 610-933-3507.