Cryptocurrencies are not seen as currencies, cash, or a means of transaction. The day isn’t far when more people will adopt them and transact in them, hopefully changing the situation. For now, however, cryptocurrencies including Bitcoin are seen as different things in different countries. Most commonly, they are deemed commodities or property.
Virtual currencies are classified as property – what does it change?
In the United States, cryptocurrencies are considered property. The IRS views Bitcoin, most importantly, as a type of property. The profits you make holding Bitcoin (due to market value increase) are categorized as capital gains. As such, this profit is taxable at 0%, 15%, or 20% (for long-term gains) and 10-37% (for short-term gains) depending on a few factors.
Cryptocurrencies are considered capital assets and the taxes you pay from the money you make with them are the same as what you’d pay for another capital asset. Bitcoin, Dogecoin, Ethereum, etc. are clubbed with stocks, a house, or bonds.
Capital gains – what are they and of how many types?
Capital gain simply means making a profit by selling an asset for higher than you purchased it for. The opposite case would be called a capital loss. There are two types of capital gains: short-term and long-term.
- A short-term gain is when you hold for less than a year (365 days exactly). Short-term gains are taxable at the rate of 10 to 37% depending on your tax bracket. Which tax bracket you’re in depends on whether or not you’re filing as a married couple and how much your single or joint income is. For example, if your income is from $209,426 to $523,600 and you’re filing singly, then your taxable income is 35% for short-term capital gains. There are more nuances here and you should read more on the IRS document.
- Long-term gains are the profits you make after 1 year of purchasing a capital asset (in this case, cryptocurrencies). Long-term gains generally have lower tax rates. You can fall in one out of three tax categories: 0%, 15%, or 20%, depending on the income you will be filing with the IRS:
- Single filing or married couple filing separately as much as $40,000; a head of household filing as much as $54,100, or a married couple filing jointly as much as $80,800 – all these people are untaxed (taxable at 0%) for long-term capital gains.
- Single filing between $40,401 and $445,850; married couple filing between $40,401 and $250,800; a head of household filing between $54,101 and $473,750; or a married couple filing jointly between $80,801 and $501,600 – all these people are taxable at 15%.
- Single filing over $445,850; a married couple filing separately over $250,800; a head of household filing over $473,750; or a married couple filing jointly over $501,600 – all these people are taxable at 20%.
So, what did we learn? There are two extremes – 0% and 37%.
In the best-case scenario, you’re filing as a single individual and your income is less than $40,000, and you’re holding your cryptocurrencies for over a year. In this case, there will be no tax for you.
On the other end, the worst-case scenario is if you’re married and holding for less than a year before cashing out while filing separately with an income of over $311,025. In this case, you’ll be taxed at 37%.
What must be declared?
The tax you pay completely depends on your income and how you’re filing. The income brackets have already been made clear. The “how you’re filing” part can have one out of four options:
- Filing singly as an unmarried individual;
- Being in marriage but filing separately;
- Being the head of a household; and
- Being in marriage and filing jointly.
You must declare your position from the four positions above. Additionally, you must also declare your income.
How much tax should you pay?
You should only pay as much tax as legally warranted in your case. Know where you stand with the specifics we have just mentioned. Also check the official IRS website to learn more about capital assets, capital gains, short-term gains, and long-term gains. You’ll be able to ascertain the exact tax rate that you’re bound to pay legally.
Don’t pay anything more or less than that.
How to prepare and report crypto filing?
Cryptocurrency profits and income from its dealings should be reported in Schedule D, an attachment of the form 1040. You can put all your dealings here as either capital gain or ordinary income.
Preparing for crypto tax filing is your responsibility. You can be in trouble if you don’t report your cryptocurrency gains while filing.
Here’s how you prepare and report crypto filings:
- Keep a track of all the profits you’ve made. For example, noting down when you purchased cryptocurrency and for how much will give you a clear idea of the profit (or loss) you’ve made at the time of filing.
- Always keep receipts or documents related to the purchase handy. For example, 1 Bitcoin was worth less than $5k on March 17, 2020. The same Bitcoin, if you purchased it on a Redot crypto exchange then, would’ve been worth $59,320 on March 17, 2021. If you fail to keep the receipt of purchase, you can be incorrectly taxed for the total holding amount and not how much profit you made.
- Maintaining the dollar equivalent value of every time you purchased Bitcoin, used it, sold it, or transacted in it is vital.
- Bitcoin (or other cryptocurrencies) received as payment or received as rewards for mining are considered as regular income. As such, they have to be clubbed along with your normal income for taxation purposes. Note that the duration of holding does not matter in this case.
- The holding period only matters when cryptocurrencies are purchased for investment purposes and sold at a profit.
The bottom line
Not many report their cryptocurrency profits or income. The guidelines for these were released back in 2014 by the IRS. Not even 900 people reported cryptocurrency dealings back then.
Unless you want to get in trouble, make sure you keep valid records of all your transactions, purchases, sales, and profits in cryptocurrency dealings and submit them when you file.