How is Cryptocurrency Taxed? Learn the Types of Cryptocurrency Tax Events

How is Cryptocurrency Taxed?

Cryptocurrencies are taxed in a variety of ways. For example, when you sell or use cryptocurrency to purchase goods and services, and the value of the cryptocurrency has increased since you acquired it, you may be taxed on the profits made.

You may also owe taxes on cryptocurrency if you receive it for doing business purposes, such as selling things or providing a service. Suppose you mine cryptocurrency (i.e., use a computer to create new coins) or receive cryptocurrency as a payment for participating in a blockchain project.

In that case, you may owe taxes on that as normal income, similar to how you would pay taxes on regular cash. You might also owe taxes on profits made when you sell or otherwise use cryptocurrency in a transaction.

These profits are called capital gains, and they are taxed based on the amount of time you hold the cryptocurrency before selling. If you had the cryptocurrency less than one year before selling, you will pay a higher rate of tax than if you had it more than one year.

In addition, if you purchase cryptocurrency as a business expense, you must declare it as a business expense and pay income tax on it. Therefore, at any point in time, you must pay income tax on cryptocurrency.

How Does Cryptocurrency Taxes Work?

Cryptocurrency taxes operate on the principle of capital gains. If you use cryptocurrency to increase its value, such as by selling it at a higher price than the original purchase price, you will pay taxes on that increase. For instance, if you purchase 1 BTC at $6,000, then sell it at $8,000 and make a profit of $2,000, you will owe taxes on that $2,000.

The amount of this tax is determined by how long you hold the cryptocurrency. If you hold the cryptocurrency for less than one year, you will pay short-term capital gains tax, while if you hold it for one or more years, you will owe long-term capital gain taxes.

The tax rates for these types of taxes vary depending on your income, ranging from 0% to 37%. It is important to understand when these taxable events occur in order to properly manage your cryptocurrency taxes. When you sell, exchange, or use cryptocurrency in a manner that increases its value.

When Is Cryptocurrency Taxed?

Selling or Using Cryptocurrency:  If you sell or use cryptocurrency in a transaction and the value of the cryptocurrency has increased since you purchased it, you may owe taxes on that benefit, known as a capital gain. These gains are taxed based on the amount of time you hold the cryptocurrency prior to selling.

Receiving Cryptocurrency for Business Purposes: If you get cryptocurrency as payment for goods or services in a business, you are required to report it as business salary and pay taxes on it.

Mining or Being Awarded Cryptocurrency: If you mine cryptocurrency, or if you are paid for work done on a blockchain to receive cryptocurrency, you must report the cryptocurrency as ordinary income to the IRS.

These are the main situations in which cryptocurrency is taxed, according to the IRS.

What Are The Types of Cryptocurrency Tax Events?

Taxable events related to cryptocurrency:

1. Selling a digital asset for regular money (fiat).
2. Trading a digital asset for property, goods, or services.
3. Swapping one digital asset for another.
4. Getting a digital asset as payment for goods or services.
5. Receiving a new digital asset from a hard fork.
6. Getting a new digital asset from mining or staking.
7. Getting a digital asset from an airdrop.
8. Any other way of getting rid of a digital asset.

Not taxable events according to the IRS:

1. Buying cryptocurrency with regular money (fiat).
2. Donating cryptocurrency to a tax-exempt charity.
3. Giving cryptocurrency as a gift to someone else.
4. Moving cryptocurrency between different wallets.