Understanding how to pay taxes on your crypto profit

Tax havens for the masses: How crypto makes tax evasion easy

When it comes to Bitcoin tax, there’s a lot to know, but the information can be quite nuanced. It doesn’t need to be complicated though and calculating and filing your cryptocurrency taxes isn’t as difficult as it seems. In this, we’ll go over everything you need to know about filing for crypto taxes.

The Internal Revenue Service (IRS) considers Bitcoin to be property rather than cash. This implies that cryptocurrencies are taxed in the same way as equities, bonds, and real estate are. Anyone who owns cryptocurrencies must disclose any profits or losses while filing taxes, regardless of how little or large their cryptocurrency holdings are.

While capital gains tax rates are now low, many people believe they will rise in the future. If the capital gains tax rate rises, it’s critical to understand how BTC profits are taxed and what you can do to limit your tax bill.

What exactly is capital gain?

A capital gain is a rise in the value of an item, such as a house or a cryptocurrency investment, that makes it more valuable than the original purchase price. The difference between a greater selling price and a lower purchasing price is the gain. When you sell an asset for less than what you purchased for it, you incur capital losses.

The length of time you keep a capital asset before selling it determines whether it is taxed as a short-term or long-term capital gain and at what rate. Short term refers to one year or less; long term refers to more than one year. Capital assets held for more than one year qualify for lower tax rates than those held for less than one year, which are taxed at the same rates as ordinary income.

For persons with taxable revenues of less than $40 USD, the long-term capital gains rate is 0% in 2022.

What exactly is a capital asset?

A capital asset is defined as something held but not utilised in a trade or business. Stocks, bonds, and real estate are examples of capital assets. When cryptocurrency is sold for a profit, it is considered a capital asset and is liable to capital gains tax. According to the IRS, “virtual money” is a digital representation of value that serves as a means of trade or store of value but lacks legal tender status in any country.

Short-term and long-term investments are the two types of capital assets:

A short-term investment is one that is held for less than a year before being sold, whereas a long-term investment is one that is held for more than a year before being sold. When you sell an investment for a profit, you pay taxes on the difference between what you bought and what you earn when you sell it, as well as any profits achieved after you pay the tax bill on your initial purchase price (assuming you have capital gains). 

A change in the capital gains tax rate may have an impact on your Bitcoin tax burden. It is important to plan ahead of time by knowing the tax consequences of your crypto transactions.

Learn how Bitcoin gains are taxed and what you can do to lower your crypto tax obligation

When it comes to cryptocurrency taxes, things aren’t always black and white. In reality, many consumers are unsure whether or not they owe taxes on their crypto assets, and if so, how much they owe. In recent weeks, there has been much discussion concerning the capital gains tax rate. If the capital gains tax rate rises, it’s critical to understand how Bitcoin profits are taxed and what you can do to limit your tax bill.

How are crypto taxes determined?

To begin, it’s important to know how your capital gain is calculated.

Capital gain is worked out by subtracting your cost basis from the Fair Market Value (FMV) of your cryptocurrency at the moment of sale. The cost basis of a coin comprises everything you spent for it, including any transaction fees you paid when you acquired it and any transaction costs you paid when you sold it. If the FMV at the time of sale was less than the cost basis, the transaction would result in a capital loss.

The long-term capital gains tax rate in the United States was set at 20% in 2017. However, depending on your income, a new ceiling of 23.8% may apply this year.

What is the taxation of Bitcoin gains?

Capital gains and losses on cryptocurrencies, like any other financial asset, are subject to taxes if you are judged to be selling capital assets. The same laws apply to cryptocurrency profits and losses as they do to stocks, bonds, and other instruments.

The sale of a capital asset is defined by the Internal Revenue Service (IRS) as “any property possessed by the taxpayer (whether or not related with their trade or company).”

Examples of capital assets would be:

  • Stocks
  • Bonds
  • Investment trusts
  • Property ownership
  • Memorabilia (art, coins, cars)

The IRS considers cryptocurrencies to be property, which means you’ll have to pay capital gains taxes on any earnings you make from selling or exchanging your cryptocurrency.

If you haven’t been keeping track of your Bitcoin transactions, the IRS’s “soft disclosure” campaign has made it simple. As long as users pay their entire tax burden, they can disclose their crypto earnings and file an updated tax return without suffering any penalties.

When it comes to paying taxes on any earnings, you have options:

Pay your taxes in cash. Most individuals cannot do this since many cryptocurrency investors have little cash on hand after realising their gains.

Pay your taxes with cryptocurrency. If you have the cryptocurrency to pay your tax due, this is a great choice. You may use a service like BitPay or Coinpayments to produce an IRS invoice and accept payment in BTC or ETH immediately.

As long as users pay their entire tax burden, they can disclose their crypto earnings and file an updated tax return without suffering any penalties.

BitPay, for example, enables customers to transfer, receive, and exchange Bitcoin immediately and securely from their preferred wallet. Under the new IRS guidelines, cryptocurrency gains are tax-deferred. This means you won’t have to pay taxes on your cryptocurrency assets until they generate taxable income.

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