Cryptocurrencies, like the popular Bitcoin, are all the rage for those looking to invest in an interesting new innovation. Cryptocurrencies get their name from the fact that they are decentralized and not government-backed. Essentially, rather than a central authority mandating their value and usage, cryptos derive their value from blockchain technology – basically, a way for investors to maintain tabs on the number and value of coin-units on the market.
If you’re considering investing in cryptocurrency, it’s important that you know all the risks and burdens that may come with it. One of the burdens you face, in addition to regular market volatility, is the fact of taxation. Yes, even though governments do not produce or regulate crypto coins, they do still levy taxes on them. If you’re curious about how this works, read on for more details.
How Are Cryptocurrencies Taxed?
If you are trading crypto coins legally, then you will have to report your earnings to the IRS (or whatever the equivalent institution may be if you live in a country other than the US). Cryptocurrency is treated as property by the IRS: that means the tax rates you pay on your ownership of crypto will be based on the current property tax rates.
- Be aware that not only will the IRS levy property taxes on your crypto ownership, but so may the US state in which you reside: every state in the US imposes some form of property tax, however, not all states impose a capital gains tax, and not all that do may include cryptocurrency in this category. Familiarize yourself with the state tax code to be sure.
If you happen to make money through cryptocurrencies by buying some, waiting for the price to go up, and then selling, you’ll be charged a capital gains tax. This is the same sort of tax that would be imposed on you if you were to make money through buying and selling shares on the stock market.
While some crypto coin owners may try to evade taxation when buying and selling their crypto, you should know that this is a federal offense and you may face significant fines and even jail time.
- If you haven’t reported your crypto earnings, consider seeking tax audit help to be sure that you are not subject to a legal investigation.
At What Rate Is Cryptocurrency Taxed?
Cryptocurrency is treated as property by the IRS, and gains made by buying and selling crypto are treated as capital gains, like investments in the stock market. That means that you:
- May be subject to state property taxes, so you should claim crypto coin ownership in your annual state tax return to avoid an audit – look into your own state’s tax code to find out the specific rate at which this is taxed;
- Will also have to pay capital gains taxes to the US federal government.
Crypto that you’ve made money by selling is taxed according to the short-term capital gains tax rates. These are the same as the regular federal income tax rates: between 10% and 37% depending on your family income and filing status.
US property tax rates vary by state, and whether ownership of cryptocurrency counts as taxable property may also vary by state, as not all state governments have sorted out what to do about cryptocurrency yet.
Property taxes are lowest in Hawaii, at 0.27%, and highest in New Jersey, at 2.44%.
If you buy and hold cryptocurrency, it is not taxed at the federal level unless it is sold. That is because there is no taxable event in the case that you simply hold onto the coin and it appreciates. However, once you sell it or purchase something with it, tax law is activated.
What Happens if I don’t Pay Taxes on Cryptocurrency?
Failing to pay taxes on Bitcoin or other crypto coins can incur a tax audit, no matter how large or small the transaction.
Failing to report crypto earnings is treated in the same way as failing to report earnings through the stock market, so be sure that if you are investing in the hot new blockchain commodity, you are fulfilling your responsibilities as a taxpayer!
Featured image: cryptowisser.com
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