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What You Need to Know About Cryptocurrency Taxes

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 How are crypto gains taxed: What You Need to Know About Cryptocurrency Taxes?

With the increasing popularity of cryptocurrency, more and more investors are getting into the market. If you are thinking about investing in cryptocurrencies, you may be wondering how those gains are taxed. You’re not alone—the IRS has been asking the same question, so it’s important to know your options when it comes to taxes on cryptocurrency investments in the United States. In this article, we’ll talk about the taxation of cryptocurrency and the potential tax implications of investing in digital currencies like Bitcoin and Ethereum. [For further reading, see: The Tax Guide to Cryptocurrency Investing.]


With the increasing popularity of cryptocurrency, more and more investors are getting into the market. If you are thinking about investing in cryptocurrencies, you may be wondering how those gains are taxed. You’re not alone—the IRS has been asking the same question, so it’s important to know your options when it comes to taxes on cryptocurrency investments in the United States. In this article, we’ll talk about the taxation of cryptocurrency and the potential tax implications of investing in digital currencies like Bitcoin and Ethereum.


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What is cryptocurrency taxes?

If you made significant income by investing in cryptocurrency, you may be subject to capital gains taxes for each year. How much you owe is based on your cost basis (the price you paid for your crypto) and whether or not it has appreciated in value since then. When calculating capital gains, remember that there are two types of crypto coins: those with a fixed supply (like Bitcoin) and those that create new coins at a predetermined rate (like Ethereum). Each type of coin is treated differently when calculating taxes. In fact, depending on which cryptocurrencies you’re holding, you could pay either short-term or long-term capital gains tax rates.

The history of cryptocurrency taxes

There has always been a certain level of question about what should be taxed and how much. While it seems relatively straightforward when you’re dealing with traditional currencies, things get much more complex when it comes to digital assets. That is why taxes on cryptocurrency have historically been quite a bit murkier than those for stocks or real estate. According to Bloomberg, a lot of questions began cropping up once Bitcoin became popular in 2017. For example, is it taxable? How is tax liability determined? The answer has not yet been finalized, though some countries have started issuing their own guidelines on how crypto should be taxed (the US, for instance).


 In general, most countries treat cryptocurrency as a type of asset rather than a currency. This means that capital gains or losses on digital assets like Bitcoin and Ethereum will be treated in much the same way as those for stocks and other securities. When it comes to taxes, you may be responsible for calculating how much tax you owe from your capital gains each year. Some countries will only tax profits once you’ve withdrawn them from exchanges into a personal account, while others will require regular reporting of your digital asset trades too. Some other factors that can determine whether or not cryptocurrencies are taxable include whether they are being mined, traded on an exchange, or used in transactions through smart contracts.


How does this apply to the US?

In most countries, cryptocurrencies like Bitcoin and Ether aren’t regulated by governments or central banks. This means that anyone who wants to own and use cryptocurrency is responsible for paying all relevant taxes. In other words, if you have profits from your cryptocurrency investment, you'll need to report those profits as capital gains on your tax return and pay taxes on them accordingly. Those same rules apply if you trade one cryptocurrency for another—that's also considered a taxable event in many places. Additionally, some jurisdictions (including China) have banned cryptocurrencies entirely, so it's important to understand how local laws could affect you. The good news is that keeping track of all these transactions isn't particularly difficult, but it does take some time.

 Of course, you don't need to pay taxes on cryptocurrency if you use it as intended—that is, as a means of payment or exchange. Some retailers accept Bitcoin and other cryptocurrencies as a form of payment, but that’s still not very common (despite a recent boom in such activity). However, because cryptocurrencies don't fall under any specific category in your tax code, some people may be tempted to treat them as non-taxable exchanges. That isn't true though—cryptocurrencies may be largely unregulated by government bodies, but they're still considered taxable events if you buy and sell them for fiat currency.


How do you report your gains on your tax return?

how do taxes work with cryptocurrency?

If you’re investing in digital currency, like bitcoin or ether, it’s important to keep track of your trading activity as well as your earnings. 


 Depend on how frequently you trade and whether you use leverage when making trades, your profits and losses can add up quickly. In addition, if an exchange ever goes belly-up and is unable to fulfill its obligations (as happened with Mt. Gox), you could be stuck with a pile of useless cryptocurrency—and not much recourse besides selling those coins at a fraction of their original value. Check out IRS Form 8949 for reporting cryptocurrency transactions, which includes brief instructions on tracking these purchases and sales.

How to report crypto on taxes

From an IRS perspective, cryptocurrencies are considered property. Gains and losses on cryptocurrency held as property, like stocks or bonds, must be reported on your tax return. Keep in mind that you might owe capital gains taxes even if you never trade cryptocurrency for traditional money. That’s because there’s a chance you could transfer it to someone else in exchange for goods or services at a later date. When that happens, that transaction is known as a taxable event and triggers capital gains taxes.



How much taxes do you pay on cryptocurrency gains


While bitcoin and other cryptocurrencies have been getting a lot of media attention, they’re still relatively unknown in mainstream circles. As such, it can be difficult for both investors and regulators to understand how capital gains on cryptocurrency should be taxed. Most countries treat cryptocurrencies as capital assets that must meet certain criteria before being treated as currency. In Canada, Canada Revenue Agency (CRA) classifies virtual currencies as commodities. This means that any trades made with them (buying and selling) may be subject to taxes depending on what kind of trader you are. Let’s take a look at how CRA views different kinds of traders so you can figure out how your taxes will be affected if you trade in virtual currencies like bitcoin or Ethereum.





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