maybe you are the one Among the millions of Americans who jumped on the Bitcoin train in 2021. Or maybe you have become an active crypto trader. Or maybe digital currency bonuses at work have become part of your compensation package. You may have also used some of them to buy something or pay someone for their services.
You might think that cryptocurrencies are not physical currencies; They are also not regulated by the US government. This means I don’t have to pay tax on the profits I make from trading cryptocurrencies, right?
While the rules of the US tax authorities regarding cryptocurrencies are unclear in many areas, they have made it clear that virtual currencies are treated as an investment asset for tax reporting purposes.
taxable profit and loss
Cryptocurrency transactions are treated in the same way as transactions in stocks, bonds or mutual funds when calculating taxable profit and loss.
- If you sell crypto for more than you paid for it, the profit will be taxed as a short-term capital gain if you have owned the currency for less than a year. Generally, people try to avoid short-term capital gains because they are taxed as ordinary income.
- If you make a profit by selling a cryptocurrency that you own for more than a year, it will be taxed as a preferred long-term capital gain. The tax rate is zero, 15% or 20% depending on your income.
- If you sell cryptocurrencies for less than what you paid for them, you may incur a capital loss, which may reduce your taxable income or offset the capital gains from the sale of other assets.
If you frequently trade cryptocurrencies, your ability to use capital losses to offset capital gains may be limited.
Seems relatively simple, right? But what if you trade bitcoin, ethereum, or other cryptocurrencies all year round, profiting from some trades and losing money from others?
Can your crypto exchange help you calculate exactly how much Uncle Sam owes you?
Answer: it depends.
fuzzy tax support
Because Cryptocurrency Exchanges Because they are not regulated by the Securities and Exchange Commission, they are not required by law to provide the same level of tax reporting that discount brokers and custodians provide to investors in stocks, bonds, and mutual funds.
While some U.S. crypto exchanges provide basic descriptions of taxable income from cryptocurrency-related trading activities, many do not.
And, to the best of our knowledge, no one is currently creating IRS Forms 1099-B and 8949, which brokerage firms and custodians provide to help consumers report income from the sale of investment assets and capital gains and losses.