Cryptocurrency is a type of virtual currency using cryptography to secure transactions. Referred to as crypto, it is considered property by the IRS and taxed the same as other assets.
You don't pay taxes on crypto at the point of purchase, or even when you hold it in your wallet, the point when you are taxed on cryptocurrency is when it is sold or exchanged--exchanging crypto could come in the form of exchanging for one crypto for another crypto or for paper money (i.e. cashing out) or even buying or selling goods or services with the crypto instead of paying with traditional paper money.
Not all transactions with crypto are taxable events, however. Here are some examples of non-taxable events involving cryptocurrency:
- Donating cryptocurrency to non-profit organizations
- Buying cryptocurrency with paper money
- Gifting up to $15,000 of cryptocurrency to others
- Transferring cryptocurrency from one wallet (that you own) to another wallet (that you own)
If you bought $1000 in cryptocurrency, and it was worth $10,000 when you used it to purchase a good or service, you would pay capital gains tax on the $9000 in earned profit.
Capital gains tax is a charge against the profit from an investment that takes place once the investment is sold.
Current U.S. federal tax policy applies the capital gains tax rate (0%, 15%, or 20% depending on the taxpayer’s tax bracket) only to the sale of capital assets that have been held longer than a year—this is known as long-term capital gains.
Short-term capital gains – those that are held for less than a year, are taxed at the regular income tax rate of the individual.
Whether you pay long-term or short-term capital gains on your crypto would depend on how long you owned it at the time of sale or exchange.
If your cryptocurrency loses value in the time you own it and you go to sell or exchange it, you will record the loss with the IRS.
If you've experienced both gains and losses in your cryptocurrency, you can report both and the losses will offset your gains.
The experts at Peter Witts CPA PC are here to help with any questions you may have about capital gains and losses regarding cryptocurrency and how they affect you.
I’m Kristin, the PWCPA PC Customer Success Specialist. For more information about this topic, or any other, you can always reach me through our customer ticketing system.