Learn how to fill out Form 8949 step-by-step. Discover the best tax software tools to report your crypto transactions effortlessly.
Capital gains tax is the amount the government charges for any property transaction. If you sell a property to make an ordinary income, you must pay taxes on the profit and loss you make from the sale.
Cryptocurrency is tagged as property in most countries; hence, any time you profit from crypto, it is a taxable event.
The Tax rate depends on the kinds of transactions you perform and some other factors. Anything that involves capital gain qualifies as taxable income.
Many consider crypto assets as a currency, but that is not how the government sees it. Crypto is not a legal form of tender in all countries. Yes, some countries see cryptocurrency as a legal means of exchange. However, few countries see the digital asset as a currency and don’t file crypto taxes.
You don’t have to pay taxes on every transaction. However, you incur capital gains tax when you buy and sell crypto or use it as a payment method.
Crypto tax rates are easy to calculate as you can treat the asset like a property. You only need to calculate the taxable income as if the coin is your property. Cryptocurrency taxed by the government must have reasonable capital gains tax rates and cost basis.
Definition of Capital Gains Tax
Capital gains tax can be defined as the profit or loss incurred from trading a particular asset. It could be real estate or cryptocurrency. Cryptocurrency taxes are dependent on capital gains. You are subject to crypto tax if you’re making money or transactions using crypto, even if it is just an ordinary income.
A crypto exchange is also a taxable event. Capital gains tax comes in at the point of disposal, where profit is made. You will incur capital gains taxes if you sell crypto for fiat currency, exchange cryptocurrency, or use it as a means of payment. These are all taxable events.
Crypto provides an alternative way to complete banking transactions without going to the bank. Hence, most governments impose crypto taxes for every transaction you make.
Understanding Capital Gains Tax
Your profit and loss determine how much tax the Internal Revenue Service will charge. For example, if you buy a crypto coin for $30,000 and sell it for $40,000, you will make a profit of $10,000. The $10,000 gain will then be termed taxable income and subject you to income tax payments.
The government must charge all crypto capital gains according to law. Most of the time, crypto tax rates range between zero and thirty-seven percent of your total profit.
The time you hold cryptocurrency before selling it determines your tax rates. If you hold the coin for less than 365 days, you will have a different tax rate from someone who sells it more than a year later.
Types of Capital Gains: Short-term vs. Long-term
There are two types of capital gains tax. The two capital gains taxes include short-term and long-term capital gains tax. The tax rate imposed on cryptocurrencies depends on how long you hold the digital assets.
If you hold cryptocurrency for over a year before selling it, you apply to the long-term capital gains tax category and vice-versa. Cryptocurrency tax affects both short-term and long-term gains. Here are the types of gain based on cryptocurrency income.
Short-term Capital Gains
Crypto short-term capital gains tax applies when you hold a crypto asset for less than a year before selling it. If you sell a cryptocurrency less than a year after you purchase it, your short-term capital gains will become taxable income.
The crypto tax rates for short-term capital gains tax depend on your total income and tax filing. If you are a single filer, you are likely to pay more short-term capital gains tax than people who use joint tax filing. Tax agencies treat married filing separately, as they are under different tax brackets.
Most times, tax rates on cryptocurrency range between ten and thirty-seven percent. However, short-term capital gains tax rates vary from person to person. Even people with ordinary income rates have to pay taxes on crypto.
Long-term Capital Gains
Long-term capital gains are similar to short-term ones because they depend on taxable income and tax filing. However, there is a significant difference between the two types. Long-term capital gains tax only applies when you hold your crypto for more than a year before selling.
Long-term capital gains tax rates are often lower than short-term crypto gains. Capital gains tax rates usually do not exceed twenty percent. However, long-term capital gains tax rates vary for every person. If your transactions are bigger, your tax will be higher.
How Capital Gains Tax Rates are Determined
It is pretty easy to determine your capital gains tax rate. Before paying crypto tax, you must determine whether you have any gain. Capital gain is dependent on the buying and selling price of the cryptocurrency. If you profit from the transaction, that is a capital gain subject to cryptocurrency taxes.
Use only the coin’s appropriate market value to calculate your transactions’ correct income tax rate. You can also include any additional fees or expenses incurred during the transaction on a cost basis.
Capital gain and losses determine how your capital gains tax rates will be calculated. You can use crypto tax software to determine your capital gains tax rate.
Gift Taxes and Sales Tax
Gifted crypto can also be taxed. It is called gift tax. However, not every country collects gift tax. Many people dread tax seasons as some try to avoid paying cryptocurrency tax. Tax evasion is illegal, and it is wrong to owe taxes.
Despite the sometimes high cryptocurrency tax rate, various individuals still show financial interest in crypto investing. Using cryptocurrency to pay for items incurs what we call sales tax.
How Capital Gains Tax Applies to Cryptocurrency
A capital gain occurs when you sell a cryptocurrency for a higher price than its market value. When this occurs, the government taxes your crypto gains, the crypto capital gains tax.
For example, if you buy $1000 worth of BTC and sell it for $1200, you see a capital gain of $200. You have to pay taxes for the $200.
After making the capital gain, you have to pay taxes on the gain you made. The tax rate for each person differs according to the taxable income and tax filing of the individual. You can avoid capital gains tax when you lose from selling or buying crypto.
Only traders who make a capital loss can avoid tax payments. You must comply with the stipulated tax rate if you gain from the transaction. The tax rate for every transaction differs.
Cryptocurrency as a Taxable Asset
Cryptocurrency is seen as property by many governments. Hence, it is a taxable asset by law. Any property transaction you make is subject to tax laws, so it is normal to have tax on your crypto.
However, cryptocurrency tax only applies when you make trading transactions. If you buy a coin without selling it, it can’t be taxed. Cryptocurrency tax applies to everyone making an ordinary income through crypto.
Tax Implications of Buying, Selling, and Trading Cryptocurrencies
Buying, selling, and trading various cryptocurrencies has several tax implications. Making certain cryptocurrency transactions, such as the exchange of BTC, incurs a certain amount of tax. The taxable income depends on the type and size of the transaction you make.
If you gift crypto to someone, you are obligated to pay tax. Buying alone does not incur tax. Here are some things that can trigger crypto taxes:
- Selling crypto assets for fiat currency.
- Using crypto to pay for items.
- Trading different cryptocurrencies for each other.
Things That Don’t Incur Income Taxes on Crypto
Some transactions using cryptocurrency do not incur any taxes. This is because there is no gain from the transaction, or it does not fall under the tax brackets. They include:
- Collecting crypto as a form of payment.
- Buying crypto with cash.
Buying Crypto With Fiat Currency
Buying crypto using fiat currency does not incur any tax implications. You can buy as much crypto as you want using cash without incurring taxes. However, when you sell the coin, you are subject to capital gain tax.
People who receive crypto as a form of payment also don’t receive any tax implications. You don’t need to pay taxes if you run a shop and accept cryptocurrency payments.
Tax Implications of Mining and Staking Cryptocurrencies
Mining involves creating new cryptocurrencies. Crypto miners are paid in cryptocurrency, and their income is taxable. Every miner’s cryptocurrency gains must go through standard tax procedures like any other taxable income. Staking crypto also has some tax implications.
Staking involves making a profit from your cryptocurrency without selling it. Most crypto investors make money from trading their coins. However, some prefer keeping their coin for staking. Interest payments from staking are subject to tax implications.
Calculating Capital Gains on Crypto Transactions
You can calculate your capital gains manually or with the help of crypto tax software. Tax software makes capital gains calculation easier.
There are several applications you can use to determine your crypto gains. That way, you don’t have to do it yourself. However, if you want to calculate your capital gains tax rate manually, it is pretty straightforward.
That is why we recommend Koinly as the ideal tax software to do taxes with. To create an account and easily calculate your taxes, click [Get started].
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Your capital gain is the profit you make for every transaction. For example, if you buy a coin for $500 and sell it for $600, you have a capital gain of $100. Only the $100 gain will incur tax.
Identifying your cost basis
Cost basis is very crucial when calculating capital tax gains. This is because you need the original price of an item before it can be taxed. It involves the original value of a cryptocurrency. Individuals need a price basis to determine whether they have a capital gain or loss.
The price basis of any transaction is the original amount invested into it. After every crypto transaction you make, you need to identify the price basis for the transaction before you can determine the capital gain or loss.
There are several methods to do this. However, once you pick one for your taxes, you must maintain it.
Reporting Crypto Capital Gains on Your Taxes
You must fill out some necessary information in your tax form to report crypto capital gains. Crypto gains and losses are found in the United States on Form 8949. The tax reporting form is pretty straightforward, and you don’t need any special knowledge to fill it.
You only need to insert the correct information into the blank spaces. The federal class of taxes includes gains from crypto investments. Whether it is long-term capital gain or short-term capital gain. The information to provide in your tax report includes the following.
- The name of the cryptocurrency
- The date you bought the cryptocurrency
- The date you completed the crypto transaction or disposed of it
- Profit or selling price
- Price basis
- Total capital gains or losses
Potential Future Changes in Crypto Tax Regulations
Cryptocurrency is rapidly advancing daily, and some countries worldwide approve crypto as a legal tender. The future of cryptocurrency is limitless. Hence, it is expected to see some changes in crypto tax regulations in the future.
If more countries accept crypto as legal tender, tax regulations can experience some changes. If crypto becomes a future legal tender, tax regulations will have to be reviewed to accommodate the changes. Shortly, you might not need to pay taxes to buy things with crypto.
Trading cryptocurrencies will also not incur any taxes if it become legal tender. At this point, very few countries, like Ecuador, have accepted cryptocurrency as legal tender. If this changes in the future, there will be adjustments to crypto tax regulations.
People complete several cryptocurrency transactions every day. These transactions are subject to tax laws, as most countries do not recognize crypto as a legal tender. Capital gains tax involves paying a certain percentage of your capital gain to the tax regulation system.
Capital gain is the profit you earn from a transaction. You must pay crypto tax for every sale or exchange of bitcoin. Also, if you use Bitcoin or other cryptocurrencies to pay for goods and services, you will be subject to capital gains tax.
Capital tax does not apply when you make a capital loss. If you do not profit from the transaction, paying tax is unnecessary. Consider your tax rate carefully before making cryptocurrency investments.
Unfortunately, this is true for the majority of crypto investors, although there are some exceptions. Major financial institutions do not recognize crypto assets as money or currency. For taxation purposes, these assets are seen as similar to shares and are taxed accordingly.
Even if your earnings were below $600, it's necessary to report them to the IRS, as per the company's guidelines. Please note that the IRS can monitor your cryptocurrency activity when they subpoena virtual trading platforms.
There are some instances where there is no capital loss or gain. This is called a wash sale. A wash sale usually happens when you buy crypto and sell it very quickly. Usually, there is no profit made from such transactions.
Tax loss harvesting is a method some crypto traders use to offset their crypto gains. This method involves making a purposeful loss to reduce the total gain you make. That way, they can avoid tax payments.