There are different cryptocurrency tax regulations in every country. No matter your place of residence, you should always register your transactions and follow certain rules. In the US, the IRS controls crypto taxes. Cryptocurrency tax is calculated using your income and how long you have held the cryptocurrency – the holding period. In 2021, the cryptocurrency tax rate will be the same as the capital gains tax rate. It’s slightly different for short-term capital gains and long-term capital gains.
How is cryptocurrency taxed?
Cryptocurrency and taxes may seem like a very complex matter. But it’s actually not that difficult to understand. The main thing you have to consider is the duration of your holding period. It is calculated from the day after you purchase a certain asset or make a cryptocurrency transaction. It continues from this date until the day that you trade the digital asset. How do you differentiate between short term and long term capital gains and their cryptocurrency tax rate? Keep reading to find out.
Short term capital gains crypto tax
Short term capital gains taxes on crypto are applicable if your cryptocurrency coins have a holding period of 365 days or less. In this event, they will be taxed as ordinary income. Short term gains range from 10-37%. The tax bracket is different for single, married filing jointly and head of household living situations. You can calculate the rate applicable for you based on your overall income and living situation.
Long term capital gains cryptocurrency taxes
If your holding period was longer than one year (above 366 days), your assets will be subject to long-term capital gains crypto taxes. They range from 0-20% and are based on your ordinary income tax rate. Similarly as in the case described above, the percentage depends on your ordinary income and living situation.
Cryptocurrency and taxes – capital vs income tax events
You are obligated by law to report any and every taxable event that affects your cryptocurrency investments. What exactly are those events? Any situations in which you realize or trigger profits. These can fall into one of two categories – capital gains and income taxes on crypto.
Capital gain taxes on cryptocurrency
Remember that the cryptocurrency tax rate is based on your income and holding period. These are the tax events in which the 2021 taxes on crypto apply:
- selling cryptocurrency for fiat currency – for example, if you buy 2 ETH for 1,000 USD and sell them for 700 USD, the capital loss of 300 dollars will get deducted from your taxable income,
- buying goods or services with cryptocurrency – perhaps you have some bitcoins stored which you bought a long time ago for a low price. Now you can use one of them to buy a car, motorbike or other valuable goods. When you trade your bitcoin for a real asset (worth e.g. $56,000), you incur a large capital gain which you need to report in your taxes,
- trading (or swapping) one crypto asset for another – whether it is done directly between two people or on an exchange, crypto taxes still apply. For example, you could have bought one cryptocurrency for a low price, and then trade all your coins for ones which are worth much more after a rate change. This way, your owned assets get raised from e.g. $500 to $3,000. That is a capital gain of $2,500 which you need to report.
Income tax on cryptocurrency
Cryptocurrency tax is calculated differently, when the tax events fall into the income category. Here are such typical situations:
- earning some crypto interest from decentralized finance,
- receiving cryptocurrency through an airdrop,
- receiving coins for carrying out a certain task,
- earning coins from staking or liquidity pools,
- receiving cryptocurrency rewards from transaction fees and block payouts.
Cryptocurrency tax evasion penalties
As of the year 2014, crypto taxes are treated like stocks or bonds, not as fiat currency. This means that you have to pay taxes on crypto whenever you sell your capital assets at a profit. If you incur a loss from a transaction, you don’t owe any taxes – but you should still report these losses when filing.
If you do not report your cryptocurrency earnings, the IRS views this as tax evasion. There are currently very strict regulations as to crypto taxes and you should not take them lightly. If you fail to report and pay your cryptocurrency taxes, you may get audited and have to pay a penalty of 20%. When the IRS decides that you deliberately under report your earnings, this penalty can get raised up to 75%. In many cases, these are huge sums – so be sure to file your earnings diligently.
Calculating crypto taxes is not as difficult as it looks. Remember to always watch your deadlines for filling in documents. Taxes on cryptocurrency are different in every country – when in doubt, reach out to an accountant who specializes in this particular field.