Although it is not the most exciting aspect of investing in cryptocurrencies, you must understand how taxes on digital currencies operate if you choose to do so. Even though cryptocurrencies are still in their infancy, the IRS is making significant efforts to enforce crypto tax compliance.
How to Ascertain Whether You Owe Cryptocurrency Taxes?
If you use cryptocurrency and its value has grown after you purchased it, you owe cryptocurrency taxes. The various categories of taxable events for bitcoin transactions are as follows:
- Converting a cryptocurrency into fiat money
- Buying products or services with cryptocurrencies
- Trading multiple forms of cryptocurrencies
To understand more read more on ‘do you pay taxes on cryptocurrency?’
Crypto tax laws become complex during currency exchanges. A cryptocurrency trade is a taxable occasion. You must record any profits in U.S. dollars on your tax return if you exchange one cryptocurrency for another.
You must record your gains and losses in US dollars for each cryptocurrency exchange you make.
You may then correctly disclose any gains or losses you have in cryptocurrency. When compared to buying and selling single coins, cryptocurrency stocks may make tracking gains and losses simpler if you like to keep things straightforward.
NFT taxes operate similarly to crypto taxes. You must pay taxes on any earnings you make from the sale of an NFT. Remember that minting an NFT and paying a gas cost in cryptocurrency is seen as paying for a service using your cryptocurrency and is therefore a taxable event.
You would be required to pay taxes on the profits if the value of the cryptocurrency you used to pay for the gas cost rose since you purchased it.
Rates of Crypto Taxes in 2022
Tax rates on cryptocurrency vary depending on your tax filing status, earnings, and how long you held a cryptocurrency before selling it. You must pay short-term profits taxes if you possessed it for less than 365 days. These are the same as income taxes.
You must make long-term gains taxes payment if you possessed them for a longer time.
The long-term gain tax rates for cryptocurrencies are as follows for the 2022 tax year:
Ordinary income is taxed on short-term profits. The cryptocurrency tax rates on the short-term profits for the 2022 tax year are as follows:
Rates of Crypto Taxes in 2023
The following are the long-term crypto tax rates to be in place when you file your 2023 tax return:
Short-term bitcoin gains are subject to conventional income taxation by the IRS. The tax rates for profits on cryptocurrency held for about 365 days or less in 2023 are listed below:
Taxation of Cryptocurrency Income?
The taxpayer must pay taxes on cryptocurrency income at its fair market value on the day it is received. Here are some of the most typical instances of what constitutes cryptocurrency income:
- Receiving cryptocurrency as payment for a service rendered
- Cryptocurrency mining for rewards
- Staking cryptocurrency to receive rewards
- Earning interest payments for lending cryptocurrency
Let’s look at a few practical strategies to reduce crypto taxes before we conclude.
- Effective cryptocurrency investments should be held for longer than a year before being sold or used. These long-term profits are taxed at a lower rate than short-term gains.
- Implement tax loss harvesting. You can sell both and use the losses to balance your winnings if you’ve made gains and losses on other sorts of cryptocurrencies.
- Consider starting a cryptocurrency IRA. This kind of IRA allows tax-deductible donations, and you only pay taxes on withdrawals when you take money out.