Cryptocurrency has been in the news a lot lately, and for good reason.
This new type of currency has the potential to revolutionize the way we conduct transactions and do business.
But what exactly is cryptocurrency, and how might it affect your taxes?
Here’s what you need to know.
What Is Cryptocurrency?
Cryptocurrency is a digital or virtual currency that uses cryptography for security.
Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control.
Bitcoin, the first and most well-known cryptocurrency, was created in 2009.
How Might Cryptocurrency Affect My Taxes?
Cryptocurrency isn’t subject to government regulation, it has grown in popularity as a way to conduct transactions without traditional banking fees.
However, this also means that cryptocurrency is taxed differently than other investments and it’s important to understand how it will be taxed so you can plan accordingly.
The IRS classifies cryptocurrency as property, not currency.
This classification has important tax implications.
One implication is that gains and losses from the sale of cryptocurrency are taxed as capital gains or losses, which are either long-term or short-term depending on how long you held the cryptocurrency before selling it.
If you held the cryptocurrency for one year or less before selling it, your gain or loss is considered short-term and is taxed at your ordinary income tax rate.
If you held it for more than one year, your gain or loss is considered long-term and is taxed at the long-term capital gains tax rate, which ranges from 0% to 20% depending on your tax bracket.
Determining Your Basis
Your basis in cryptocurrency is generally the cost of acquiring it plus any associated costs of purchase, such as broker commissions.
When you sell cryptocurrency, you will calculate your gain or loss by subtracting your basis from the proceeds of the sale.
Let’s say you bought one bitcoin for $1,000 and paid a $10 commission to acquire it.
Your basis would be $1,010 ($1,000 + $10). If you then sold that bitcoin for $2,000, your gain would be $990 ($2,000 – $1,010).
That gain would be subject to taxation as either a short-term or long-term capital gain depending on how long you held the bitcoin before selling it.
Treating Cryptocurrency like Stock Sales
In general, if you sell cryptocurrency within 24 hours of purchasing it, the transaction will be treated like a stock sale for tax purposes.This means that any gains or losses will be treated as short-term capital gains or losses and will be taxed at your ordinary income tax rate.
If you buy one bitcoin for $1,000 and sell it 24 hours later for $2,000, you would have a short-term capital gain of $990, which would be taxed at marginal rates ranging from 10% to 37%, depending on your overall income and filing status..
Because cryptocurrency can be volatile, it’s important to keep meticulous records of your transactions so that you can accurately report any gains or losses come tax time.
I know that is a lot to take in but my team is here to help. Call us today with any questions or concerns!