Cryptocurrency Taxation in the
When tax season
comes around, cryptocurrencies are just like any other asset class.
Unfortunately, cryptocurrency taxes appear so complex that few people file
them. Others see cryptocurrency as a means to move money illegally – which
means avoiding taxes entirely.
cryptocurrency becomes mainstream and the Internal Revenue Service (IRS) shifts
its focus to digital assets, it’s becoming more important than ever to pay
cryptocurrency taxes. Here’s how to approach cryptocurrency this upcoming tax
All cryptocurrency trades and sales are taxable.
You have to
report gains and losses on all individual trades to the IRS. Specifically, this
means that exchanging a cryptocurrency for another, converting it back to USD
or spending cryptocurrency are considered taxable events.
The IRS is increasingly focused on crypto tax evasion.
What happens if
you don’t pay cryptocurrency taxes? Like any other type of tax fraud, avoiding
cryptocurrency taxes can result in a maximum sentence of five years in prison
or a maximum fine of $250,000.
From 2013 to
2015, fewer than 900 people filed cryptocurrency taxes annually. But the IRS’
focus has increasingly shifted towards cryptocurrency taxes. Following a 2017
court case, Coinbase now has to release information about investors who have
traded over $20,000 to the IRS.
There are two main types of cryptocurrency taxes.
According to the
IRS’ Guidance on Virtual Currencies, cryptocurrency is property, not currency.
This means that you have to pay capital gains tax.
There are two
different types of capital gains taxes: long-term and short-term. Long-term
means that you held a currency for over a year before selling or trading it
while short-term applies to cryptocurrencies you’ve had for less than a year.
These rates depend on your state and your tax bracket, though long-term capital
gains tax is typically lower.
Crypto can also
be subject to income tax. This is when you’re paid in cryptocurrency by an
employer, and your crypto is classified as earnings. You pay the same amount in
crypto income tax as you would in USD. This means that cryptocurrency income
taxes are divided into the same seven IRS tax brackets, ranging from 10 percent
to 37 percent. Forty-three states also have their own income taxes.
Overall, employees and employers have to report cryptocurrency earnings and withholdings, respectively, as they would with USD.