Understanding Crypto Taxes

Taxes must be paid as part of buying and selling cryptocurrency to comply with the Internal Revenue Service (IRS). Cryptocurrency transactions may be decentralized and virtual. However, there are some situations where you must pay taxes on them.

Is There a Need to Pay Crypto Tax?

Most cryptocurrencies, according to the IRS, are convertible virtual currencies. What this implies is that they can be exchanged for money, and act as a unit of account, a store of value, and a medium of exchange.

This also means that you are also responsible for paying taxes on any profit or income you generate from your cryptocurrency. The taxation of cryptocurrency is complex because, depending on the circumstances, you may or may not owe taxes.

Knowing your tax obligations in advance will help you avoid surprises when the IRS comes to collect from you if you use or own cryptocurrency. For example, you may be required to pay tax under the following circumstances:

·       Like with a share of stock, you must pay capital gains taxes on any profits made from the sale of cryptocurrency.

·       Taxes apply if you used cryptocurrency to purchase goods or services over its value in the purchase price.

·       You must file a tax return on any cryptocurrency income received if you accept it in exchange for products or services.

·       Mining cryptocurrency counts as income if the crypto is worth what it was when it was mined.

Read: Top 5 Safest Cryptocurrency Exchanges for 2023

How Is Cryptocurrency Taxed?

If there is a loss or gain from a cryptocurrency sale, trade, or disposal, taxes must be paid. Just like every other asset, you will also pay taxes if you trade or sell the cryptocurrency for a profit. Similarly, non-fungible tokens should be reported as capital gains or losses.

These are some additional occurrences that would make you pay cryptocurrency taxes:

·       Mining

·       Trading

·       Receiving as a reward or payment

·       Paying for goods and services with it

Additionally, if you sell 1 BTC for $6,000 three months after purchasing it for $4,000, you will have to pay taxes on the $2,000 gain. The same applies to a loss. This means that, if you purchased the cryptocurrency for $8000, but then sold it for $6000, you can use the loss of $2000 to offset other gains and reduce your taxable income.

How Much Tax Do You Owe on Crypto?

Your tax liability on crypto is mainly determined by how much you exchange or spend, your income level and tax bracket, and how long you have held the cryptocurrency you used.

If you own a cryptocurrency for less than a year, for example, you will have to pay taxes at your usual income tax rate. Also, if you have held it for more than a year, you will have to pay capital gains taxes on the gains that you have made on it.

How To Avoid Paying Tax on Your Cryptocurrency

The best way to avoid paying taxes on your cryptocurrency is to not use it. If the value of your cryptocurrency increases, you will eventually be required to pay taxes when you trade it, sell it, exchange it, or convert it to fiat.

The simplest way to keep your cryptocurrency tax-free is to HODL. You will eventually have to pay cryptocurrency tax if you earn it as income or sell it for profit.