Cryptocurrency is just like any other asset class when tax season comes around. Unfortunately, cryptocurrency taxes appear so complex that few people file them. Others see cryptocurrency as a means to move money illegally – which means avoiding cryptocurrency taxes entirely.
As cryptocurrency becomes more mainstream and the Internal Revenue Service (IRS) shifts its focus to digital assets, it’s more important than ever to pay cryptocurrency taxes. Here’s how to approach cryptocurrency this upcoming tax season
You have to report gains and losses on all individual trades to the IRS. Specifically, exchanging a cryptocurrency for another, converting it back to USD or spending cryptocurrency are taxable events.
What happens if you don’t pay cryptocurrency taxes? Like any other type of tax fraud, avoiding cryptocurrency taxes can result in a maximum sentence of five years in prison or a maximum fine of $250,000.
From 2013 to 2015, fewer than 900 people filed cryptocurrency taxes annually. But the IRS’ focus has increasingly shifted towards cryptocurrency taxes. Following a 2017 court case, Coinbase now has to release information about investors who have traded over $20,000 to the IRS.
According to the IRS’ Guidance on Virtual Currencies, cryptocurrency is property, not currency. This means that you have to pay capital gains tax.
There are two different types of capital gains taxes: long-term and short-term. Long-term means a that you held a currency for over a year before selling or trading it while short-term applies to cryptocurrencies you’ve had for less than a year. These rates depend on your state and your tax bracket, though long-term capital gains tax is typically lower.
Crypto can also be subject to income tax. This is when you’re paid in cryptocurrency by an employer, and your crypto is classified as earnings. You pay the same amount in crypto income tax as you would in USD. This means that cryptocurrency income taxes are divided into the same seven IRS tax brackets, ranging from 10 percent to 37 percent. Fortythree states also have their own income taxes.
Overall, employees and employers have to report cryptocurrency earnings and withholdings, respectively, as they would with USD.