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How to calculate taxes on your crypto profits
Always stay on the good side of the IRS.
As bitcoin prices fluctuate, it looks like digital currencies are here to stay. But it’s increasingly falling under the purview of the taxman. After years of trying to categorize bitcoin and other assets, the IRS decided in March 2014 to treat cryptocurrencies as property.
That ruling comes with good and bad. On one hand, it gives cryptocurrencies a veneer of legality. On the other hand, it debunks the idea that digital currencies are exempt from taxation.
As you might expect, the ruling raises many questions from consumers. Does the IRS really want to tax crypto? Is anybody paying taxes on their bitcoin and altcoins? And how do you calculate crypto taxes, anyway?
The information in this article is not professional tax advice. Like its value, crypto’s regulatory landscape is in a state of constant flux. Anyone looking to learn about taxation of virtual currency should refer to the IRS’s Virtual Currency Guidance page for the latest information. Cryptocurrency is complex and speculative, and past performance is no guarantee of what you’ll find in the future. Before making any decisions, you should seek professional tax advice.
The truth about cryptocurrency taxes
The IRS reports only some 800 to 900 Americans filed taxes on property “likely related to bitcoin” in the years 2013, 2014 and 2015.
But the government is tempted by all that activity it’s seeing in the cryptocurrency space. And it’s looking to tease out the taxes that come with crypto transactions.
Here are a few things you should know about the crypto-tax landscape
Take the IRS’s recent legal case against Coinbase, one of the largest cryptocurrency companies in the world. In late 2016, it demanded Coinbase’s customer records in a bid to investigate potential tax fraud. A year later, a California federal court ordered Coinbase to hand over customer records of anyone transacting $20,000 or more in any year between 2013 and 2015.
Why did the IRS want this information? Because it suspected many people incurred tax liabilities on their crypto purchases — liabilities that had long gone unpaid. Make no mistake: Cryptocurrency is taxable, and the IRS wants in on the action.
This means most individuals don’t pay taxes on their crypto — something that might change as more people are audited by the IRS.
If you’ve heard of capital gains and wondered what those are, just think of crypto. Did you buy bitcoin and sell it later for a profit? That’s a capital gain. If you sold it and lost money, you have a capital loss.
So, taxes are a fact of life — even in crypto. That’s the bad news.
But there’s good news: Figuring out your tax bill isn’t as difficult as it sounds.
Compare crypto tax trackers
Which IRS forms do I use for capital gains and losses?
IRS update as of October 2019
In a draft of its new Form 1040, the IRS includes a new question about crypto:
At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?
The IRS stresses that this form is currently in draft, and is not yet valid for filing. However, keep a lookout for the update when you next file.
Calculating your crypto taxes for gains and losses takes just three steps
You may have crypto gains and losses from one or more types of transactions. A few examples include:
- Exchanging one crypto for another
- Spending crypto on goods and services
For these calculations, we’ll exclusively use selling. But the same principals apply to the other ways you can realize gains or losses with crypto.
1. Find out how much you made selling crypto.
To find your total profits, multiply the sale price of your crypto by how much of the coin you sold.
Next, subtract how much you paid for the crypto plus any fees you paid to sell it. (In tax speak, this total is called the basis.)
Finally, you’ll get what’s known as a realized gain — your profit after you sell.
Realized gains vs. unrealized gains: An example
You buy 1 bitcoin (BTC) for $10,000. In a week, it shoots up to $18,000. You’ve made $8,000, but only on paper.
Because you haven’t sold your bitcoin yet, this is an unrealized gain. And unrealized gains aren’t taxed.
The following week, however, your bitcoin is worth $15,000. You sell it for a profit of $5,000. Your $5,000 profit is a realized gain, which means you’ll pay taxes to the IRS on it.
2. Figure out whether you have a short-term or long-term gain.
Find the date on which you bought your crypto. Then glance at your calendar and note today’s date.
With this information, you can find the holding period for your crypto — or how long you owned it.
You can also figure out if you have a short-term or long-term gain:
- You have a short-term gain if you held your crypto for one year or less.
- You have a long-term gain if you held your crypto for longer than one year.
Your tax rate ultimately depends on the type of gain you’ve realized.
3. Calculate your taxes.
If you have a short-term gain, the IRS taxes your realized gain as ordinary income. Accordingly, your tax bill depends on your federal income tax bracket. Mining coins, airdrops, receiving payments and initial coin offerings are also taxed as income. Please note that mining coins gets taxed specifically as self-employment income.
2018 federal income brackets
|Tax rate||Single||Married, filing jointly||Head of household|
|10%||$0 to $9,525||$0 to $19,050||$0 to $13,600|
|15%||$9,526 to $38,700||$19,051 to $77,400||$13,601 to $51,850|
|25%||$38,701 to $93,700||$77,401 to $156,150||$51,851 to $133,850|
|28%||$93,701 to $195,450||$156,151 to $237,950||$133,851 to $216,700|
|33%||$195,451 to $424,950||$237,951 to $424,950||$216,701 to $424,950|
|35%||$424,951 to $426,700||$424,951 to $480,050||$424,951 to $453,350|
|39.6%||$426,701 or more||$480,051 or more||$453,351 or more|
Short-term gain: An example
You’re a single filer who makes $30,000 a year, which means you’re in the 12% tax bracket.
You buy 1 BTC on January 1, 2017, and sell it for a $500 profit on March 1 of the same year.
That’s a short-term gain, so you owe $60:
$500 x 12% = $60
If you have a long-term gain, you’ll pay a capital gains tax rate on your crypto profit. You’ll likely also see a smaller tax bite.
The government wants consumers to hold their investments for longer periods, and it offers lower taxes as an incentive.
There are three tax brackets for long-term capital gains: 0%, 15% and 20%.
2018 capital gains tax rates
|Long-term capital gains tax rate||Single||Married, filing jointly||Head of household||Married, filing separately|
|0%||$0 to $38,600||$0 to $77,200||$0 to $51,700||$0 to $38,600|
|15%||$38,601 to $425,800||$77,201 to $479,000||$51,701 to $452,400||$38,601 to $239,500|
|20%||$425,801 or more||$479,001 or more||$452,401 or more||$239,501 or more|
Long-term gain: An example
You’re a single filer who makes $70,000 a year, which means you’re in the 15% tax bracket for long-term capital gains.
You buy 1 BTC on January 1, 2017, and sell it for a $2,000 profit on February 1, 2018.
This is a long-term gain, so you owe $300:
$2,000 x 15% = $300
2019 IRS crypto updates
On October 9, 2019, the IRS issued new tax guidance on crypto. This included Revenue Ruling 2019-24, which covered hard forks, and an update to its crypto FAQs. Here’s a quick rundown on what you need to know:
Rules regarding hard forks
Highlights on FAQ updates
Where to buy, sell and exchange cryptocurrency
What if I sold my crypto at a loss?
If you’ve sold your crypto as a loss, you might be able to claim it as a deduction — up to a limit.
Here’s how to calculate your deduction
Find the sale price of your crypto and multiply that by how much of the coin you sold. Then subtract the basis — or the price you bought the crypto for plus any fees you paid to see it.
If the result is a capital loss, the law allows you to use this amount to offset your taxable gains.
But $3,000 is the maximum you can deduct each year.
Deducting your losses: An example
A month ago, you sold 1 BTC for a $1,000 profit. Today, you sold 1 BTC for a $300 loss.
Though it stinks to sell at a loss, it’s not all bad: Now you can use it to decrease your taxable gains.
Before, the IRS would tax $1,000 of your profit. Now, you’ll likely pay taxes on only $700.
If you hit the $3,000 cap, you may be able to use the excess amount to offset taxable gains in the following year. Talk to a tax professional that specializes in cryptocurrencies to discuss your specific situation and what you can expect to pay.
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