The cryptocurrency market continued its bearish trend this week, as the news of the US Treasury Department possibly investigating claims of money laundering using cryptocurrencies circulated. However, despite the risks that investing in it may present, cryptocurrency has continued to gain traction in mainstream transactions.
Earlier this month, Paypal’s Venmo launched its crypto platform, allowing its 70 million users to now buy and sell Bitcoin, Litecoin, Ethereum, and Bitcoin Cash. In retail, industry giants like Tesla, Microsoft, and Square have all invested heavily in the cryptocurrency market. With more consumers and businesses alike making investments in Bitcoin’s growth, another issue has come to light: the tax obligations of holding and selling cryptocurrency. With the extended tax return deadline quickly coming up, more information is coming to light on whether you are liable for taxes on your cryptocurrency – and how it may affect your taxes this year.
The Criteria For Cryptocurrency Taxing
There are also no tax-free criteria for cryptocurrency. Any amount of cryptocurrency sold or mined needs to be reported to the IRS using Form 1040. Failure to report cryptocurrency activity would mean you are liable for an under-reporting or failure to pay a penalty by the IRS. Capital gains Taxable events for cryptocurrency include the sale of cryptocurrency (in any currency and not just USD), the use of cryptocurrency to purchase goods or services, and trading cryptocurrency in exchange. However, if you have received cryptocurrency interest earnings, crypto mining income, or cryptocurrency as payment for work, you are liable to pay income tax.
Cryptocurrency’s Property Classification Means Capital Gains Tax On Realization
According to a 2014 IRS ruling, cryptocurrency is classed as capital assets. This essentially means that holders of cryptocurrency are taxes on an increase in values, but only when that gain is realized. Therefore if you bought $4,500 worth of cryptocurrency in 2019, which would now be worth $41,775, you are not liable for any tax unless you choose to sell it.
Your Length Of Holding Determines Your Rate Of Tax
The classification of cryptocurrency as property heavily determines the levying of IRS charges on virtual currencies in many ways. The use of the capital gains model means that the amount of tax you owe depends on how long you have held it for, as well as the profit or loss you make on its sale. Based on the IRS’s Capital Gains and Losses worksheet, consumers who hold property (or cryptocurrency) for 12 months or less are required to pay the standard income tax rate based on the federal tax bracket you satisfy. It is important to note that income from cryptocurrency is taxed in conjunction with other income sources, and not separately. For instance, if you are earning $150,000 annually and liable for short-term capital gains tax on $58,000 in cryptocurrency gains, you would fall into the 37 percent federal income tax bracket.
However, if you have held the cryptocurrency for more than 12 months, you could pay less in taxes. Long-term capital gains are taxed at a lower rate than short-term investments and vary between 0 percent and 20 percent based on income criteria. If you are filing as a single individual and your income is $40,400 or less for the year, then you would pay 0 percent in capital gains tax on your cryptocurrency sale. However, those who earn up to $445, 850 will be liable for a 15 percent capital gains tax and 20 percent if it exceeds that. Similarly, if you earn cryptocurrency due to a reward scheme or as interest, it would be taxed as ordinary income and not capital gains – unless you went on to sell it.
What If I Made A Loss On My Sale Of Cryptocurrency?
If you report losses on the sale of cryptocurrency, you can write it off against some of your other taxable income. However, it does come with stipulations. Losses on the sale of cryptocurrency can be used to lower your taxable income by up to $3,000. If there is any loss remaining, tax filers can carry their losses over to the following years, indefinitely until it is exhausted.
As the authorities move to implement more regulations and curb massive under-reporting of cryptocurrency gains, you can expect more detailed tax rules for Bitcoin. Based on their moves so far, it certainly looks like the IRS is forging ahead.