Crypto-investors: How to find out if you owe taxes on your cryptocurrency
The tax law can easily make your head spin. When you add cryptocurrency to the mix, it can get even more confusing. But it is important to know how taxes on cryptocurrencies work to avoid getting into trouble with the tax authorities.
We have put together a few items you should consider to help you determine if you need to pay taxes on your cryptocurrency.
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Do you have to worry about taxes on crypto?
Understanding the type of crypto transactions that are taxable can be confusing. Usually, if you make money on your cryptocurrency, you have to share a portion of the profits with the IRS. Below are some questions you can ask yourself to find out if you have a taxable event.
- Did you sell cryptocurrency at a profit in 2022?
- Have you extracted 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 bought Bitcoin last year and you’re still holding on to it. If you do not sell it or exchange it in any way this year, you do not have to worry about taxes. It is a good idea to consult your CPA or tax advisor to find out more about how certain transactions may affect your tax.
What you should know about taxes on crypto
In the eyes of the IRS, cryptocurrencies like Bitcoin and Ethereum is considered a type of property instead of a currency. You have to pay tax on crypto just like you do for stocks and other types of real estate. Here are some taxable situations you may encounter:
- If you are a crypto miner, your cryptographer is considered taxable income – even if you do not sell it. Your crypto mining taxes are based on the real market value of the cryptocurrency when you receive it.
- Selling or exchanging cryptocurrency creates a taxable event if the realized value of your cryptocurrency is greater than what you originally paid for it.
Your broker or stock exchange should send you Form 1099 during the tax period. This will provide an overview of capital gains and losses, so you can fill out tax form 8949 from the IRS. If you do not receive any tax filing forms, you are still responsible for reporting your cryptocurrencies to the IRS.
What are the crypto tax brackets?
You must pay short- or long-term capital gains tax if you make money on crypto. Your taxes on cryptocurrency gains depend on how long you held on to your crypto before you threw it away.
The short-term capital gains rates – from 10% to 37% – are the same as the prices you will pay on the income you earn from working. These short-term crypto-tax rates apply to day traders and other investors who sell their cryptocurrency within one year of acquiring it.
Take a look at the short-term tax rates for cryptocurrency gains below before you sell.
|
Single |
Gift Filing Common |
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 bought Bitcoin for $ 40,000 in January 2022, and it rises to $ 60,000 in December 2022. If you decide to sell in December, you will have a short-term capital gain of $ 20,000 because you kept on your crypto for less than a year.
You can bypass the short-term price gains if you hold on to your crypto for over a year before selling. The long-term capital gains rates are very attractive, giving you access to the tax brackets of 0%, 15% and 20%. A single philistine who earns up to $ 40,400 per year in 2022 can enjoy the 0% capital gains tax rate. If you are married and file together, you can earn up to $ 80,800 before paying long-term capital gains tax.
Manage your cryptocurrency
If you have cryptocurrency transactions during the year, you should talk to your CPA or tax advisor about any consequences. Selling, receiving, exchanging and recovering cryptocurrencies can all be taxable events. Keep track of all your crypto transactions during the year so that you are not hit by an unexpected tax bill later.
