Paying Taxes on Crypto
The IRS classifies cryptocurrencies, including Bitcoin, as property, and crypto transactions are subject to tax like other transactions related to property. However, you will only be required to pay taxes when you sell, trade, or dispose of crypto and receive gains. For example, if you buy Bitcoin worth $1,000 and sell the tokens later for $1,500, you will need to report and pay taxes on those earnings. Alternatively, if you dispose of the Bitcoin and record a loss, you can deduct it from your taxes. Buying Bitcoin is not a taxable event, meaning you should not pay taxes when you do not sell. You won’t owe the IRS any taxes if you buy and hold Bitcoin in a personal wallet or on an exchange platform like yuan pay group, even if its value increases. Tax responsibilities only come into practice when you engage in a taxable event, such as selling the crypto. The IRS has taken various steps to ensure crypto investors comply with tax regulations. Today, tax filers must answer a query on Form 1040 to determine if they have made any transaction related to crypto during the year. The tax regulator requires crypto exchanges to file a 1099-K for clients with more than 200 transactions and trading volumes exceeding $20,000 during the year. It has also summoned crypto exchange companies to find investors who have conducted at least $20,000 worth of crypto transactions between 2016 and 2020.
Crypto Tax Rates
Cryptocurrency tax rates mainly depend on an individual or entity’s income, tax filing status, and the length of time they held the crypto before selling it. Those who have owned Bitcoin for one year or less must pay short-term gains taxes, equivalent to income taxes. On the other hand, owning crypto for more than one year makes you eligible to pay long-term gains taxes. According to the IRS, the current tax rates for long-term gains on crypto investments range from 0% to 20%. You can file the taxes as a single individual, head of a household, or jointly if you are married. The same applies to filing short-term gains taxes. The regulator taxes short-term gains as ordinary income, with interest rates ranging from 0% to 37%.
How to Determine if You Owe Bitcoin Taxes
You owe crypto taxes if you use your Bitcoin in any way, and its value had increased from when you purchased the tokens. The key taxable events for Bitcoin transactions include.
Selling Bitcoin for fiat currencies.Using Bitcoin for goods and services payments.Trading Bitcoin with other cryptocurrencies.
If you have used Bitcoin in any of the above taxable events and its value has increased over time, you owe taxes to the IRS. You can determine what you owe by comparing the cost basis or the amount of money paid to acquire the crypto with its sales price or its profits. However, things usually get complicated when trading Bitcoin with other cryptocurrencies. The IRS stipulates those who trade one crypto for another must report any gains made in USD on their tax returns. Overall, using Bitcoin to trade and pay for goods and services carries tax implications. However, you should not pay tax on Bitcoin if you do not sell.
