Tax law can easily make your head spin. When you add cryptocurrency to the mix, it can become even more confusing. But it’s important to know how taxes for cryptocurrency work to avoid getting in trouble with the IRS.
We’ve put together a few items you should consider to help you determine if you need to pay taxes on your cryptocurrency.
Image source: Getty Images.
Do you have to worry about taxes on crypto?
Understanding what type of crypto transactions are taxable can be confusing. Typically, if you make money from your cryptocurrency, you have to share a slice of your profits with the IRS. Below are a few questions to ask yourself to help determine if you have a taxable event.
People are also reading…
- Did you sell cryptocurrency for a profit in 2022?
- Did you mine crypto?
- Have you received any cryptocurrency in exchange for goods or services?
- Have you made purchases with your cryptocurrency?
If you answered yes to the above questions, you most likely have a taxable event. But let’s say you purchased Bitcoin last year, and you’re still holding on to it. If you don’t sell it or exchange it in any way this year, you won’t have to worry about taxes. It’s a good idea to consult with your CPA or tax advisor to learn more about how certain transactions may affect your taxes.
What you should know about taxes on crypto
In the eyes of the IRS, cryptocurrency such as Bitcoin and Ethereum is considered a type of property instead of a currency. You’ll have to pay taxes on crypto just like you do for stocks and other types of property. Here are some taxable situations you may encounter:
- If you are a crypto miner, your crypto is considered taxable income — even if you don’t sell it. Your crypto mining taxes are based on the fair market value of the cryptocurrency when you receive it.
- Selling or exchanging cryptocurrency creates a taxable event if the realized value of your crypto is greater than what you originally paid for it.
Your broker or exchange should send you Form 1099 during tax time. This will give an overview of your capital gains and losses so that you can complete IRS tax Form 8949. If you don’t receive any forms during tax time, you’re still responsible for reporting your crypto transactions to the IRS.
What are the crypto tax brackets?
You’ll have to pay short- or long-term capital gains taxes if you make money on crypto. Your taxes on crypto gains depend on how long you held on to your crypto before disposing of it.
The short-term capital gains rates — ranging from 10% to 37% — are the same as the rates you would pay on the income you earn from working a job. These short-term crypto tax rates apply to day traders and other investors who sell their cryptocurrency within a year of acquiring it.
Take a look at the below short-term crypto capital gains tax rates before you sell.
|
Single |
Married Filing Jointly |
Head of Household |
|
|---|---|---|---|
|
10% |
$0 to $10,275 |
$0 to $20,550 |
Up to $14,650 |
|
12% |
$10,276 to $41,775 |
$20,551 to $83,550 |
$14,651 to $55,900 |
|
22% |
$41,776 to $89,075 |
$83,551 to $178,150 |
$55,901 to $89,050 |
|
24% |
$89,076 to $170,050 |
$178,151 to $340,100 |
$89,051 to $170,050 |
|
32% |
$170,051 to $215,950 |
$340,101 to $431,900 |
$170,051 to $215,950 |
|
35% |
$215,941 to $539,900 |
$431,901 to $647,850 |
$215,951 to $539,900 |
|
37% |
Over $539,900 |
Over $647,850 |
Over $539,900 |
Table source: Author. Data Source: IRS.
Let’s say you purchased Bitcoin for $40,000 in January 2022, and it surges to $60,000 in December 2022. If you decide to sell in December, you’ll have a $20,000 short-term capital gain because you held on to your crypto for less than a year.
You can bypass the short-term capital gains rates if you hold on to your crypto for over a year before selling. The long-term capital gains rates are very appealing, giving you access to the 0%, 15%, and 20% preferential tax brackets. A single filer who earns up to $40,400 per year in 2022 can enjoy the 0% capital gains tax rate. If you are married and filing jointly, you could earn up to $80,800 before you have to pay long-term capital gains taxes.
Managing your crypto tax liability
If you have any cryptocurrency transactions during the year, you should talk to your CPA or tax advisor about any potential consequences. Selling, receiving, exchanging, and mining cryptocurrency can all be taxable events. Keep track of all your crypto transactions during the year so you won’t be hit with an unexpected tax bill later.
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Tax law can easily make your head spin. When you add cryptocurrency to the mix, it can become even more confusing. But it’s important to know how taxes for cryptocurrency work to avoid getting in trouble with the IRS.
We’ve put together a few items you should consider to help you determine if you need to pay taxes on your cryptocurrency.
Image source: Getty Images.
Do you have to worry about taxes on crypto?
Understanding what type of crypto transactions are taxable can be confusing. Typically, if you make money from your cryptocurrency, you have to share a slice of your profits with the IRS. Below are a few questions to ask yourself to help determine if you have a taxable event.
People are also reading…
- Did you sell cryptocurrency for a profit in 2022?
- Did you mine crypto?
- Have you received any cryptocurrency in exchange for goods or services?
- Have you made purchases with your cryptocurrency?
If you answered yes to the above questions, you most likely have a taxable event. But let’s say you purchased Bitcoin last year, and you’re still holding on to it. If you don’t sell it or exchange it in any way this year, you won’t have to worry about taxes. It’s a good idea to consult with your CPA or tax advisor to learn more about how certain transactions may affect your taxes.
What you should know about taxes on crypto
In the eyes of the IRS, cryptocurrency such as Bitcoin and Ethereum is considered a type of property instead of a currency. You’ll have to pay taxes on crypto just like you do for stocks and other types of property. Here are some taxable situations you may encounter:
- If you are a crypto miner, your crypto is considered taxable income — even if you don’t sell it. Your crypto mining taxes are based on the fair market value of the cryptocurrency when you receive it.
- Selling or exchanging cryptocurrency creates a taxable event if the realized value of your crypto is greater than what you originally paid for it.
Your broker or exchange should send you Form 1099 during tax time. This will give an overview of your capital gains and losses so that you can complete IRS tax Form 8949. If you don’t receive any forms during tax time, you’re still responsible for reporting your crypto transactions to the IRS.
What are the crypto tax brackets?
You’ll have to pay short- or long-term capital gains taxes if you make money on crypto. Your taxes on crypto gains depend on how long you held on to your crypto before disposing of it.
The short-term capital gains rates — ranging from 10% to 37% — are the same as the rates you would pay on the income you earn from working a job. These short-term crypto tax rates apply to day traders and other investors who sell their cryptocurrency within a year of acquiring it.
Take a look at the below short-term crypto capital gains tax rates before you sell.
|
Single |
Married Filing Jointly |
Head of Household |
|
|---|---|---|---|
|
10% |
$0 to $10,275 |
$0 to $20,550 |
Up to $14,650 |
|
12% |
$10,276 to $41,775 |
$20,551 to $83,550 |
$14,651 to $55,900 |
|
22% |
$41,776 to $89,075 |
$83,551 to $178,150 |
$55,901 to $89,050 |
|
24% |
$89,076 to $170,050 |
$178,151 to $340,100 |
$89,051 to $170,050 |
|
32% |
$170,051 to $215,950 |
$340,101 to $431,900 |
$170,051 to $215,950 |
|
35% |
$215,941 to $539,900 |
$431,901 to $647,850 |
$215,951 to $539,900 |
|
37% |
Over $539,900 |
Over $647,850 |
Over $539,900 |
Table source: Author. Data Source: IRS.
Let’s say you purchased Bitcoin for $40,000 in January 2022, and it surges to $60,000 in December 2022. If you decide to sell in December, you’ll have a $20,000 short-term capital gain because you held on to your crypto for less than a year.
You can bypass the short-term capital gains rates if you hold on to your crypto for over a year before selling. The long-term capital gains rates are very appealing, giving you access to the 0%, 15%, and 20% preferential tax brackets. A single filer who earns up to $40,400 per year in 2022 can enjoy the 0% capital gains tax rate. If you are married and filing jointly, you could earn up to $80,800 before you have to pay long-term capital gains taxes.
Managing your crypto tax liability
If you have any cryptocurrency transactions during the year, you should talk to your CPA or tax advisor about any potential consequences. Selling, receiving, exchanging, and mining cryptocurrency can all be taxable events. Keep track of all your crypto transactions during the year so you won’t be hit with an unexpected tax bill later.
10 stocks we like better than Walmart
When our award-winning analyst team has an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Stock Advisor returns as of 2/14/21
The Motley Fool has a disclosure policy.
