Cryptocurrency trading might feel like the Wild West, but come tax season, several IRS rules still apply

Cryptocurrency trading might feel like the Wild West for much of the year, but come tax season, several IRS rules still apply.

NewsNation) - Cryptocurrency trading might feel like the Wild West for much of the year, but come tax season, several IRS rules still apply.

The IRS treats cryptocurrencies like bitcoin as property, similar to stocks, bonds or gold. That means if you sold crypto during the year, you’ll need to report it on your tax return as a capital gain or loss.

Depending on how long you held the crypto before selling, you’ll owe short-term or long-term capital gains tax on any profit. If you’re just holding crypto, and don’t sell it, you won’t owe taxes on unrealized gains.

However, capital gains tax isn’t the only thing to consider, as crypto transactions can also trigger ordinary income tax if you receive crypto as payment for work.

Here’s what to know about cryptocurrency and your taxes.

Do I have to pay taxes on crypto?

Maybe. It all depends on how you used your crypto. Certain transactions trigger taxable events, while others don’t.

If you sold crypto, any gains or losses will typically impact your taxes, just like other investments taxed by the IRS. Spending crypto, like using bitcoin to buy a car, also creates a taxable event.

On the other hand, simply buying crypto with cash and holding it in a wallet isn’t taxable. Neither is transferring crypto between wallets you own.

Here are a few examples of what is and isn’t taxable, according to Coinbase, the largest U.S.-based crypto exchange:

Not taxable

Taxable

How is crypto taxed?

Crypto can be taxed as capital gains or ordinary income. It depends on how you acquired it and how long you held onto it.

Taxed as capital gains

Let’s say you buy bitcoin. It goes up in value, then you sell it for a profit. You have to pay capital gains tax on the money you make, just like you would selling a stock for a profit.

It’s worth noting: Capital gains tax on cryptocurrency applies even if you don’t convert it to dollars.

The tax rate depends on how long you hold it before selling. If you own cryptocurrency for a year or less, you’ll pay short-term capital gains tax. If you sell your cryptocurrency after more than a year, you’ll pay long-term capital gains tax, which tends to be a better rate.

If you sell your cryptocurrency for a loss, then you may be able to deduct that loss on your taxes, which could lower your overall bill.

There are a couple of other scenarios where your cryptocurrency could be taxed as a capital gain:

Taxed as income

In some scenarios, crypto gets taxed as income, not as a capital gain.

The most obvious example is if you are paid in crypto. In that case, your crypto would be taxed as compensation according to your income tax bracket.

While it may not be a traditional paycheck, you are responsible for reporting any crypto income to the IRS.

The crypto you receive through mining is also subject to income taxes, according to Coinbase.

How much will I owe in crypto taxes?

If you earn crypto through your job, it will be taxed as ordinary income. The rate depends on your federal income tax bracket — the higher the income, the higher the tax rate.

Currently, tax rates are separated into seven different levels: 10%, 12%, 22%, 24%, 32%, 35% and 37%. When your income reaches a higher tax bracket, you don’t pay the higher rate on your entire income. Instead, only the portion of income in that tax bracket is taxed at the higher rate.

Your filing status also determines what rate your income gets taxed at.

Capital gains and losses

If you sell your crypto for more than you paid for it after less than a year, then it gets taxed as a short-term capital gain. If you sell for a profit after holding for more than a year, then it’s taxed at a lower rate as a long-term capital gain.

Remember, capital gains tax only applies when you’ve sold your crypto. You won’t pay taxes on any unrealized gains if the value has gone up but you haven’t sold the asset.

TurboTax has a crypto tax calculator you can use to estimate your capital gains/losses.

If you received your crypto from mining, the IRS considers it taxable income at the “fair market value” on the day you received it. That fair market value is what you would use to calculate any future gains or losses when you sell it later on.