Cryptocurrency may be seen as a wild frontier for many in the investment world, but no one can escape the taxman. Cryptocurrency is as subject to taxation as any other asset, but its tangled definition means that understanding the tax regulations regarding it can be difficult. Here’s what you need to know as the deadline for filing approaches.
What Can be Taxed
Gains and losses on all individual cryptocurrency trades have to be reported to the IRS. That includes every time that you spend cryptocurrency, convert one form of cryptocurrency to another, or convert cryptocurrency into American dollars. Miners are also required to pay taxes on their earnings. The act of mining qualifies as self-employment. While that means that miners have to pay a self-employment tax, it also leaves them open to deductions for expenses related to mining like power costs.
But that doesn’t mean that every act related to cryptocurrency is subject to taxation. Buying and keeping cryptocurrency isn’t taxed in its own right. Instead, taxes are only levied when a trader decides to use it to make a purchase or trade it for another currency. One silver lining is that you can count any losses and apply them to save on your capital gains taxes. Additionally, cryptocurrency tokens may not be subject to taxation. Since they don’t have any value as a currency in and of themselves, they don’t fall under the typical jurisdiction of the IRS, but you should check with a tax specialist to make sure that you’re compliant with new IRS standards.
The Taxes Applicable to Cryptocurrency
Despite its name, cryptocurrency qualifies as property rather than currency under the rules of the IRS. That means that profits from trades or mining are subject to short-term or long-term capital gain taxes. Determining which category is appropriate is easy. If you possessed the cryptocurrency for a year or longer before trading it, it qualifies as a long-term gain. Any length of time shorter than that qualifies as a short-term gain. The rates can vary depending on your bracket, but long-term gains are often charged lower rates, so it may be in your best interest to wait before making a sale if you’re trying to minimize your tax liability. Cryptocurrency can also be subject to an income tax but only when it’s paid to you by an employer.