How Are Cryptocurrencies Taxed?

GettyImages-919078630-2-300x200

Given how cryptocurrency is not backed by any central authority, there is relatively little regulation governing it. That said, it is still taxable, particularly when it’s exchanged as payment or held as a capital asset. Because of that, Bitcoin, Ethereum, and other virtual currencies often need to be reported on your income tax return.

When Cryptocurrencies Are Not Taxed

But first, there are situations where cryptocurrency isn’t taxed. If you have purchased virtual tokens with your own money, it is not considered income. As such, until you sell it for a profit or loss, you won’t have to report it.

In addition, while holding cryptocurrency as a capital asset does have some tax implications, no taxes are actually paid until you realize a profit from selling it.

Virtual Currency and Income Taxes

On the other hand, any time you receive payment in the form of virtual currency, it must be reported as income and may therefore be subject to income taxes.

Cryptocurrency as Income

For instance, if you’re working for a company that pays you in Bitcoin, you need to include that payment in dollars as you would any other taxable wages. Your employer would also need to withhold taxes as they would with any other income on your W-2.

Mining Virtual Currency

Taxes apply to mined virtual currency as well. Many people use powerful computers to solve complex equations and “mine” cryptocurrency on public transaction ledgers. Any cryptocurrency successfully mined in this manner must be reported as income.

Know Its Worth

In both these cases, you’ll need to determine how much your virtual currency is worth in U.S. dollars at the time of the transaction. That amount is reported on your tax return.

Capital Gains Taxes

Often, virtual currency is held with the intent of making a profit later on. In these cases, it’s treated as any other capital asset, such as real estate, stocks, bonds, etc. If sold for a profit, the amount gained must be reported as a capital gain on your taxes. That means you need to record both its value at the time you obtained it as well as at the time of sale.

Short-Term Vs. Long-Term Capital Gains

The time when it’s sold determines how it’s taxed. Short-term gains are those realized within a year of obtaining the asset, and are often taxed at a higher rate than long-term gains. On the other hand, long-term capital gains usually have lower rates, so if you’re looking to minimize capital gains taxes from virtual currency, you might be better off holding onto it for more than a year.

Recording Capital Losses from Cryptocurrency

Often, virtual currency depreciates in value. It may be sold at a loss, and those losses would be reported on your tax return. Capital losses can offset capital gains, potentially reducing your taxable income.

Minimizing Taxes from Cryptocurrency

Dealing in cryptocurrency requires a bit more record-keeping than most taxpayers may be used to. That said, if you’ve kept careful records, handling the tax implications of virtual currency isn’t too much more complicated than managing any other asset. That said, the laws are in constant flux in this area, and it’s often best to consult with a professional when minimizing your tax burden.

 

By
Posted in:
Tagged: and
Published on:
Updated:

Comments are closed.

Contact Information