Cryptocurrencies are taxed differently in different countries. It mostly depends on what are they considered. For example, in the US, all cryptocurrencies are considered property. As such, they are just like capital assets such as a house, stocks, or bonds. Consequently, they’re taxed just like them.
Cryptocurrencies are not considered currencies or means of transacting by the IRS.
How crypto mining is taxed?
Cryptocurrency mining is considered ordinary income by the IRS. It makes sense if you think about it. You’re renting your hardware power (which you’ve purchased) to do computational work. If one were to compare mining to another ordinary income, a distant connection could be made to providing a hosting service or running a media server that others can rent.
As ordinary income, cryptocurrency mining is to be combined with the other income channels you have while filing tax returns.
How much tax to pay on trading cryptocurrencies?
Trading cryptocurrencies can be of two types: short-term and long-term gains.
- Short-term gains are those that you make after cashing out within a year of investing. Short-term cryptocurrency trading or investment gains are taxed at anywhere from 10% to 37% depending on how are you filing (individually, as a married couple filing singly, as a married couple filing jointly, or as a head of a household) and the income bracket.
- Long-term gains are the profits you make on holding your cryptocurrencies for over a year. Long-term cryptocurrency gains can be taxed at 0%, 15%, or 20% depending on how you file (again – individually, as a married couple filing singly, as a married couple filing jointly, or as a head of a household) and your income bracket.
The IRS income brackets for long-term gains on capital assets (including cryptocurrencies) are:
- 0% tax rate:
- For individuals filing singly: up to $40,000;
- For a married couple filing separately: up to $40,000;
- Head of a household filing: up to $54,100;
- A married couple filing jointly: up to $80,800.
- 15% tax rate:
- For individuals filing singly: $40,401 to $445,850;
- For a married couple filing separately: $40,401 to $250,800;
- Head of a household filing: $54,1010 to $473,750;
- A married couple filing jointly: $80,801 to $501,600.
- 20% tax rate:
- For individuals filing singly: over $445,850;
- For a married couple filing separately: over $250,800;
- Head of a household filing: over $473,750;
- A married couple filing jointly: over $501,600.
It’s possible to pay a 0% tax (or no tax) on IRSif you hold for long-term and file individually while being in the income bracket of $0 to $40,000.
Crypto to fiat exchange and how it is taxed
Crypto to fiat exchange is considered a conversion. All conversions between fiat (like USD cash) and cryptocurrencies (such as Bitcoin) are taxable. The cryptocurrency you end up holding is irrelevant for tax purposes. The USD-equivalent value of the asset at the time of conversion is what matters.
Assume you purchased 1 BTC on Redot for $5,000 in mid-2020. After a year, the value of that 1 BTC is $36,000. You made a profit of $31,000. It’s been more than 12 months of holding, so it classifies as a long-term capital gain.
The profit will be taxed as per the capital gain tax rate. When you exchange the 1 BTC after making a profit back into fiat (USD), you’ll be taxed on the amount of profit you made.
Exactly what rate will apply to you depends on how you’re filing for returns and which income bracket you fall in. This is how fiat to crypto and crypto to fiat exchanges are taxed by the IRS in the US.
Do you have to pay taxes when you spend cryptocurrencies?
It depends on how you spend them.
- If you’re paying any other human being on the planet on their cryptocurrency wallet using your own cryptocurrency wallet (none of which are an exchange wallet – which is simply bad for holding your investments), then there’s no way the IRS can track or monitor this transaction. You pay no taxes.
- When you buy something with cryptocurrencies online, again, if the transaction was sent to a user-controlled wallet then it doesn’t show up in your tax returns.
- If you pay exchanges in cryptocurrencies to convert them into fiat, you need to pay taxes on any profit you made because of holding.
Are losses from exchange hacks and theft still taxable?
No. If an exchange is hacked and your money is lost, or if your wallet is hacked and your money is lost – you’re not required to pay any tax.
As cryptocurrency is a capital asset, when you cease to own the asset, you cease to have a responsibility to pay any taxes on it. Per the IRS, theft has to be illegal in nature. Any such theft makes the market value of your property 0, instantly (except in the special case of Ponzi type investments). Read more here.
How to lower taxes on your crypto assets?
Short-term cryptocurrency investments have a higher tax rate than long-term holding profits. Apart from that, filing separately or individually also has a lower tax rate than filing as the head of a household or jointly as a couple.
You cannot directly reduce the tax levied on your cryptocurrency income or capital gains as a result of investments or trading. However, cryptocurrencies are created as a means of transactions and payments. Out of all the features they have such as security and privacy, anonymity happens to be one.
Here are a few tips:
- Receive cryptocurrency payments and send them only between user-owned wallets. Don’t transact using wallets on exchanges, as these exchanges are normal companies and not blockchain technologies. As such, they’re supposed to heed any demand for handing over customer information when asked by the IRS.
- Purchase cryptocurrencies using platforms that allow you to remain anonymous and present the least amount of KYC requirements.
- Transacting cryptocurrencies between people is completely decentralized and peer-to-peer. What this means is that no intermediary is involved in the process, including the government or the banking system. As long as you’re using your own wallet, the money you move cannot be snooped upon.
- To further cloak yourself, it’s normal to run a full node on your computer and use the wallet it comes with, or even store your precious cryptocurrency in cold wallets (hardware wallets that aren’t connected to the internet).
