Five Ways Cryptocurrency Earnings are Taxed
Many people have invested in cryptocurrency as their stable income source since the creation of Bitcoin. Investors enjoyed the tax-free crypto earnings for a few years. However, nothing lasts forever.
Various government agencies, including the Internal Revenue Service (IRS), since 2014 have sought to tax cryptocurrency. Currently, crypto is categorised like most assets.
With crypto as a newbie in the industry, the IRS does not have concrete guidelines for taxing the said asset. However, the IRS requires traders and investors to report any cryptocurrency earnings despite the lack of such policies.
A person engaged in the crypto industry needs to solve taxes to reduce this and increase one’s revenues. If you want to learn how crypto trading platforms work, try a safe and beginner-friendly one yourself with the Immediate Edge platform.
Here are some essential points to know about cryptocurrency taxes.
- Crypto can be taxed in two ways.
Presently, the IRS can tax crypto earnings as either capital gains or business income. The following differentiates one from the other.
Capital Gains Tax
Capital gains refer to earnings that offshoot from purchasing an asset and selling it at a higher price. A scenario would be if one bought one Ethereum in September 2018 and spent $2,500. If this coin was sold after three years in September 2021 and sold for $3,500, the difference, which is $1,000, is called capital gains.
Currently, the range is from 0% to 37% for the US capital gains tax rate, which is dependent on whether it is short-term or long-term. Long-term capital gains allude to earnings made by selling assets for over one year, lowering the tax rate. Thus, most investors hold on to their assets for a year before they sell.
Business/Corporate Income Tax
Business income is an earning when a person or company exchanges goods or services for crypto. For instance, if a business accepts crypto payments, the crypto received would be considered business income. This also works similarly when an employee gets crypto when working for an employer. Currently, the US mean corporate income tax rate is 24%.
- Trading different kinds of crypto are taxable.
There is this misconception that exchanging one kind of crypto for another is not considered a disposition and does not qualify for taxation. Disposition is the process of letting go of an asset through transferring, giving, or selling. However, trading is taxable since a person sells or buys an asset.
- Crypto earnings can either be an ordinary or capital loss.
An entity that suffers from a loss, whether an investment or a business transaction, can deduct this loss from its taxes. This applies as well to cryptocurrency.
A scenario would be if a person has bought two Ethereum coins in 2018 and sold one in 2021. The capital loss would be the difference of the amount purchased minus the amount sold for one of the coins.
- Crypto holding or possessing is not equivalent to being taxed.
Another misconception is that when an individual possesses crypto, they are incurring taxes. This will only happen if it undergoes disposition, as discussed in point number two.
- Record keeping of crypto transactions is a must.
Keeping records of business transactions is a must for business owners. These include customer payments and expenses. However, suppose the business accepts crypto payments. In that case, other kinds of information should be included, such as the crypto wallet addresses, the crypto value in US dollars during disposition, and the software costs for the transaction.
There are those who do not seem to give significance in their knowledge about taxes. However, being knowledgeable about taxes would be helpful in the long run. Knowing taxes would decrease making errors as well as reducing taxes. Therefore, despite the non-structured guidelines of the IRS regarding crypto taxation, it would be best to learn more about crypto earnings by taking note of the points in this article.