How Do Cryptocurrency Taxes Work
Unfortunately, capital gains tax rules apply to the cryptocurrency Industry. IRS which means The Internal Revenue Service treats all cryptocurrencies the same and taxes them when tradition has been complete. The tax rate is based on your total income. If your total income of everything you make in a year is very little done you may be paying taxes as little as 10% but if you are making millions of dollars you are going to be paying like 30%.
Short Term Capital Gains: If you hold your cryptocurrency such as Bitcoin or Ethereum for one year or less than a year, it is considered as a short term and you are going to get taxed at your regular income tax rate.
Long Term Capital Gains: If you hold your profit for more than a year, you are going to get taxed as long term. It depends on your annual income.
If you earn cryptocurrency like Bitcoin or others by mining it, or receive it as a promotion, it also counts as part of your regular taxable income.
Information About Cryptocurrency Taxes
If you sell your cryptocurrency and make money but do not take that money out of your account and do not cash out, you have to pay cryptocurrency taxes as well. Because it is about when the trade closes. It is not about when you withdraw the money. Trade closing means trade is complete because you bought and sold. Therefore, whether you choose to remain in your account or whether you choose to take that money out of your account is your decision. When the transaction ends, you are going to pay cryptocurrency taxes.
If you buy bitcoin or another alt coin, then it just continues to rise; you are not going to be subject to tax unless you sell that. It means trade has not been completed. For instance, if you buy bitcoin for $1,000 and sell it for $5000, it means you made a $4000 profit. You will not get taxed on the full $5000. Because the first $1000 was your principal. You are only going to pay cryptocurrency taxes on the profits that you made.
How to Minimize Crypto Taxes
If you think you can owe cryptocurrency taxes in the future, do not forget that you can minimize taxes. If you hold your investment for one year or more before selling, it will be considered as a long-term capital gain. For long term gains the maximum rate is just 20% while the maximum rate is 37% for short term gains. So, it also depends on how much money you are going to make in a year. People think that short term capital gain is like a penalty but that is not true. It is just being taxed at your regular rates. It does not have any benefit. Long-term capital gains are beneficial.
Offset Gains with Losses
Just like any investment you can take advantage of crypto gains by claiming losses on other investments throughout a year in your profit. That means if you made $5000 by selling Bitcoin but lost $5000 for selling Ethereum at the same time, you would not owe any cryptocurrency tax since you got nothing. If you are about to get a lot of money from a large crypto investment, you can look through the rest of your portfolio to see if there are any losing investments you could sell to offset your gains.
You can consider investing through a retirement plan. If you invest in cryptocurrency using a retirement plan like a Roth IRA you can avoid investment gains entirely, however it is not as easy as investing with a normal account and it is not that common.