Every time you purchase, trade, or earn cryptocurrency like Bitcoin, you should know how it affects your tax liability. Even when you using mining games from platforms like RollerCoin, your crypto may be subject to taxes from the IRS. Unsure how cryptocurrency is taxed? No worries, we've got you covered in this article. We’ll discuss essential facts about crypto taxes in 2024.

Is Cryptocurrency Taxed?

Crypto transactions are subject to taxation in most countries, including the United States, the United Kingdom, Canada, and Australia. These countries treat cryptocurrencies as property and tax them accordingly. Thus, the gains from selling, trading, or using the item for profit are subject to taxation like capital gains. Assuming you sell, trade, or use the asset at a loss due to depreciation, you might be able to offset some of your taxable gains with such losses. The tax you owe varies based on your cryptocurrency gains and losses, the duration of holding the asset, and the tax regulations in your country or region. Since every taxable event can generate a capital gain, it's crucial to have information on the date, sale value, cost basis, and fees linked to each transaction.

Categories of Crypto Tax Events

You won't be taxed for every transaction with Bitcoins or other cryptocurrencies. In general, the following are regarded as taxable events:

• Selling crypto for fiat: If you sell your crypto for cash and the sale results in a profit, you'll owe taxes on the gains. However, if you incur losses, you may be eligible to deduct them from your taxes.
• Using cryptocurrency to purchase goods and services: Using Bitcoin to buy a grocery, for instance, will likely result in tax obligations. The Internal Revenue Service views spending cryptocurrency as similar to selling it.
• Exchanging one cryptocurrency for another: If you convert your Bitcoin to Ether, it's technically considered a sale of your Bitcoin before acquiring a new asset. Hence, the IRS views this as a taxable event. As long as you made more money from the sale of your Bitcoin than you spent on it, you’ll receive a tax bill.

However, in most cases, the following do not constitute taxable events:

• Paying cash for crypto and holding it: Simply purchasing and holding cryptocurrency typically isn't subject to taxation on its own. Taxes usually come into play when you sell the cryptocurrency, at which point any gains "realized" become taxable.
• Contributing crypto to a recognized tax-exempt charity or nonprofit organization: Donating cryptocurrency to a charity can allow you to claim a charitable deduction on your taxes.
• Receiving a gift: If you receive cryptocurrency as a gift, you generally won't face taxes until you sell it or engage in a taxable activity, such as staking.

What Is the Crypto Tax Rate?

Cryptocurrency mining, staking, and payment profits are subject to ordinary income tax, and the exact rate depends on your income bracket. However, the rate you pay capital gains tax on cryptocurrency assets differs according to how long you hold them. U.S. tax policy favors long-term investments due to the reduced capital gains rate. In most cases, the crypto tax rate drops significantly after one year of holding. Here's how the different tax rates work:

Short-Term Crypto Tax Rate

The profits from selling a digital asset you keep for one year or less are taxable as capital gains. Their tax rate is based on your total income and is known as your ordinary income rate.

Long-Term Crypto Tax Rate

Cryptocurrency profits held for longer than a year are subject to the more favorable long-term capital gains rate of taxation. While your effective tax rate hinges on your total income, the rates for long-term capital gains are typically lower than short-term gains.

Cryptocurrency Tax Reporting

To ensure accuracy when reporting your taxes, it's crucial to maintain better organization throughout the year. For instance, you'll need to track and log the amount spent and the market value of each cryptocurrency transaction at the time of use. This record will be essential for reference when it's time to file your taxes. You can manage this process manually or opt for a blockchain solution platform that helps track crypto transactions and organize your data. These platforms offer portfolio and transaction tracking features, allowing you to effectively manage your assets and access crypto tax information when needed. IRS Form 8949, Sales and Dispositions of Capital Assets, is where you declare your gains and losses from cryptocurrency investments alongside those from other assets. When filing your cryptocurrency taxes for the first time, you should see a licensed accountant if you have any questions or concerns. They can provide guidance and ensure accurate reporting.

Final Thoughts

The combination of income and capital gains taxes makes cryptocurrency taxation a complex matter. In many instances, you may face taxation at various stages of using cryptocurrency. Given this complexity, it's advisable to seek guidance from an accountant who possesses expert-level experience with cryptocurrency and up-to-date practices to ensure accurate tax reporting.