Cryptocurrency and Taxes

Cryptocurrencies are treated as property by the IRS. Tax rules that apply to stocks, also apply to cryptocurrencies. So, if you have a profit from the sale of cryptocurrencies, you will pay a capital gains tax. The amount of capital gains tax you pay is dependent upon both your income and the time duration you held the cryptocurrency for. Any cryptocurrencies bought and sold within a year are treated as short-term capital gains and will have a higher capital gains tax, possibly as high as 20%. Cryptocurrencies held for a year or more are treated as long-term capitals gains and will have a lower tax rate of around 15%. Again, the realized tax you pay on capital gains is dependent not just on how long you held the cryptocurrency for, but also your stated income. Generally speaking, the higher your income, the more you will pay in taxes. Short-term capital gains are taxed as ordinary income, which includes wages.

If you’re a single filer earning under $40,400, or a married couple making under $80,800, you have a 0% capital gains rate for any sale of a cryptocurrency that’s been held for at least a year (long-term capital gains).

Now, if you sell a cryptocurrency at a loss, you can claim a capital loss deduction. If your yearly annual loses exceed yearly annual gains, you can deduct up to $3,300 per year. Any excessive losses beyond that can be carried over to future tax years.

The same logic applies to paychecks. If you receive payment in bitcoin or any other cryptocurrency, it’s counted as ordinary income.

If you’re an independent contractor and receive payment in the form of cryptocurrency, it will count as self-employment income.

The IRS ask specifically about cryptocurrency transactions on the first page of the 1040 this year. You have to mark “yes” if you received any cryptocurrency, purchased a cryptocurrency, traded a cryptocurrency, spent a cryptocurrency, etc. By checking “yes” on the 1040 form you’re acknowledging you had some sort of financial transaction with a cryptocurrency – but this doesn’t mean you will necessarily be taxed. You’re only taxed if you sold cryptocurrencies for a profit. If you simply bought a cryptocurrency and held it, without exchanging it for another cryptocurrency or selling it, then you are not taxed. It’s no different from a stock in that respect.

Contrary to above, you can check “no” regarding the IRS’ question on the 1040 form if you did have cryptocurrency transactions, but did not have a taxable event such as selling cryptocurrencies or receiving cryptocurrency in the form of payment. If you simply bought and held or transferred a cryptocurrency between wallets, there is no taxable event.