When it comes to crypto, there are a lot of questions. How do you pay your taxes on crypto? Do you have to pay tax on all crypto? The answer is yes; all digital currency is taxable.
It’s also important to note that if you bought cryptocurrency with fiat money, such as dollars or euros, that purchase is technically considered a barter transaction and subject to capital gains taxes.
So even if you haven’t sold any of the coins yet, you still need to report them when filing your returns, which should be counted as part of your taxable income. You can use a cryptocurrency tax calculator to know how much taxes you have to pay for the cryptocurrencies you have.
This post explores how the IRS treats different types of cryptocurrencies, what impacts how much in taxes one pays on their holdings and where to find help to ensure everything gets reported correctly!
What is a taxable event?
A taxable event is when you sell, trade or use cryptocurrency. You need to pay tax on your crypto’s value at the event’s time. A person who wants to buy a cup of coffee with cryptocurrency must pay taxes for that transaction (capital gains tax).
- Buying crypto from an exchange or mining it
- Selling crypto on an exchange
- Trading one type of coin for another type of coin (exchanging)
- Using a token as payment for goods and services
What if you sell your crypto-currency to get another cryptocurrency?
If you sold your crypto-currency to get another cryptocurrency, e.g., sold Bitcoin to buy Ethereum, then this would be classed as a ‘disposable asset’ and not a capital gain (which is only permissible when selling an asset held for more than a year).
If you sold your Bitcoin for more money than you paid, you would be required to pay taxes on the gain (e.g., £100 per coin purchased at £1 = 100 coins). You can only claim a loss if you sell your cryptocurrency for less than you bought it (e.g., £50 per coin purchased at £1 = 50 coins).
What if you sold your crypto-currency to buy something with it, e.g., a new TV or car?
If you sold your crypto-currency to purchase a good or service, then no, you do not have to pay tax on that transaction. However, if you sold your crypto-currency and realized a gain from the sale, this is considered income and will be subject to taxation. Purchasing goods or services with Bitcoin is not taxable under current rules (except if you use BCH on Purse for Amazon purchases).
What if your cryptocurrency went up in value, but you never sold it?
The tax man wants his share if you have made a profit on your crypto investment. Whether it’s a small gain or one that has turned into a fortune, if you hold onto it and sell it later on, that’s fine. But if you use it at any point during the year to buy something (for example, a new laptop), then that counts as disposing of an asset for less than its market value and will be taxed as income.
Any profits from selling cryptocurrencies must be added to any other income from investments such as stocks and shares during the tax year and taxed accordingly.
This article has gone through the tax implications of your cryptocurrency holdings. It’s not an easy subject, but it can hugely impact how much you pay. You should always speak with a tax professional or use a cryptocurrency tax collector before making any decisions to ensure that you are fully informed and don’t miss out on any opportunities or deductions.