Figuring out how to Pay Capital Gains Tax on your Crypto

If you purchased bitcoin before the price skyrocketed, then there’s a good chance you may owe taxes on your unrealized cryptocurrency gains. Fortunately, it’s not as hard as it sounds to calculate and file your crypto taxes. In this article, we’ll show you everything you need to do to file your crypto taxes.

If you own cryptocurrency and are unsure of what the taxes on cryptocurrency gains are, keep reading. In the event of an increase in the capital gains tax rate, it’s important to understand how cryptocurrency gains are taxed, and what you can do to reduce your tax liability.

How crypto is taxed? 

The Internal Revenue Service (IRS) classifies cryptocurrencies as property — not currency. This means that cryptocurrencies are taxed like stocks, bonds or real estate. Anyone who owns crypto must report any gains or losses when filing their taxes, no matter how small or large their cryptocurrency holdings may be.

While the current capital gains tax rates are low, many are speculating that they may go up. If you own cryptocurrency and are unsure of what the taxes on cryptocurrency gains are, keep reading. In the event of an increase in the capital gains tax rate, it’s important to understand how cryptocurrency gains are taxed, and what you can do to reduce your tax liability.

What is a capital gain?

A capital gain is an increase in the value of an asset — like a house or a cryptocurrency investment — that gives it a higher worth than the purchase price. The gain is the difference between a higher selling price and a lower purchase price. Capital losses occur when you sell an asset for less than you paid for it.

How long you hold onto a capital asset before selling it determines if it will be taxed as a short-term or long-term capital gain and at what rate. Short term means one year or less; long term is greater than one year. Capital assets held for longer than one year qualify for more favorable tax rates (lower) than those held for less than one year, which are taxed at ordinary income tax rates.

For 2021, the long-term capital gains rate is 0% for individuals with taxable incomes under $40,

Cryptocurrency investors are faced with many challenges. They might not know how to get started, or how to find a cryptocurrency wallet. They might also be unaware of what the taxes on cryptocurrency gains are.

What is a capital asset?

In short, a capital asset includes anything that is owned but is not used in a trade or business. Examples of capital assets include stocks, bonds, and real estate. Cryptocurrency is also considered a capital asset and is subject to capital gains tax when sold at a profit. The IRS defines “virtual currency” as a digital representation of value that functions as a medium of exchange or store of value and does not have legal tender status in any jurisdiction.

Capital assets fall into two categories: short-term and long-term investments. A short-term investment is one held for less than one year before being sold; a long-term investment is held for more than one year before being sold. When you sell an investment at a profit, you’re paying taxes on the difference between what you originally paid and what you get when it’s sold — plus any gains realized from that sale after you pay the tax bill on your initial purchase price (assuming you have capital gains). You can use TurboTax online to prepare your federal income tax return.

A change in the capital gains tax rate could affect your cryptocurrency tax liability.

It’s important to plan ahead by understanding the tax implications of your crypto transactions.

Learn about how cryptocurrency gains are taxed, and what you can do to reduce your crypto tax liability.

When it comes to taxes on cryptocurrency, things aren’t always black and white. In fact, many people aren’t sure whether or not they owe taxes on their crypto assets — and if so, how much they owe.

There has been a lot of talk about the capital gains tax rate in recent weeks. While we don’t know yet what the new rates will be, if you own cryptocurrency and are unsure of what the taxes on cryptocurrency gains are, keep reading. In the event of an increase in the capital gains tax rate, it’s important to understand how cryptocurrency gains are taxed, and what you can do to reduce your tax liability.

How are crypto taxes calculated?

First of all, how is your capital gain calculated? It is calculated by taking the Fair Market Value (FMV) of your crypto at the time of sale minus your cost basis. Cost basis includes everything you paid to acquire that coin, including any transaction fees that you paid when you bought it and any transaction fees that you paid when you sold it. If your FMV at time of sale was less than your cost basis, then you have a capital loss for that transaction.

The IRS does not allow individuals to aggregate their trades unless they use like-kind exchange treatment for their trades. This means that every trade must be reported individually on Form 8949 (Sales and Other Dispositions of Capital Assets). The process of aggregating all those trades can be extremely difficult and time consuming if you

In 2017, the United States’ long-term capital gains tax rate was capped at 20 percent. This year, however, a new cap of 23.8 percent could apply depending on your income.

How are cryptocurrency gains taxed?

As with any other financial asset, capital gains and losses on cryptocurrency are subject to taxation if you’re considered to be selling capital assets. Cryptocurrency gains and losses fall under the same rules as stocks, bonds and other securities.

The Internal Revenue Service (IRS) defines the sale of a capital asset as “any property held by the taxpayer (whether or not connected with their trade or business).” For example:

  • Stocks
  • Bonds
  • Mutual funds
  • Real estate
  • Collectibles (art, coins, cars)

The IRS considers cryptocurrency to be property, which means that you’ll pay capital gains taxes on any profits from a sale or exchange of your crypto.

If you haven’t kept track of your cryptocurrency transactions, the IRS has made it easy with the “soft disclosure” initiative. This allows users to report their crypto gains and file an amended tax return without facing any penalties, as long as they pay their full tax liability.

You have three options when it comes to paying taxes on any gains:

Pay taxes in cash. For most people, this isn’t an option, since many crypto investors have no cash-on-hand after realizing their gains.

Pay taxes in crypto. If you have the crypto available to pay your tax liability, then this is an excellent option. You can use a service like BitPay or Coinpayments to generate an invoice from the IRS and receive payment directly in BTC or ETH. You’ll need to fill out Form 1040-ES for the IRS and pay your estimated tax payment based on how much you owe.

Sell enough of your crypto to pay your tax liability and report the taxable gain on your tax return. This is probably the easiest option for most people who have realized capital

The IRS considers cryptocurrency to be property, which means that you’ll pay capital gains taxes on any profits from a sale or exchange of your crypto.

If you haven’t kept track of your cryptocurrency transactions, the IRS has made it easy with the “soft disclosure” initiative. This allows users to report their crypto gains and file an amended tax return without facing any penalties, as long as they pay their full tax liability.

For example, BitPay allows users to instantly and securely send, receive and convert Bitcoin directly from the wallet of their choice. Cryptocurrencies are tax-deferred under the new IRS rules. This means that you will not have to pay taxes on your crypto investments until it becomes your taxable income.

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