Cryptocurrencies have quickly become popular as investments, yet it remains unknown if they’re taxed like stocks? In short, yes – the IRS taxes cryptocurrency like any other form of property. That means if you sell your cryptocurrency for cash or trade it for another cryptocurrency/asset/good/service you may likely incur capital gains taxes when selling or exchanging for said asset/goods/services purchased with it.
Due to IRS classification of cryptocurrency as property rather than currency, and sale or exchange as a taxable event, any time cryptocurrency transactions take place must be reported immediately as they occur.
When selling cryptocurrency for cash, when calculating capital gains or losses you must subtract your cost basis from the sale price and subtract out any gains or losses to determine your capital gains/losses. If your sale price surpasses your cost basis then a capital gain has occurred; otherwise it has resulted in a capital loss. Your federal and state income tax bracket determine the tax rate that applies; higher income taxpayers tend to pay a greater proportion of their income in taxes.
Just as with selling cryptocurrency for cash, taxation may apply when trading it for other cryptocurrencies or assets. When trading cryptocurrency, you must report both its fair market value (FMV) and your original cost basis; similarly when receiving cryptocurrency as payment or mining rewards you must report that amount as income on your tax return.
Donating cryptocurrency to charity does not require reporting it on your tax return; however, you should keep meticulous records to accurately calculate your tax liability.
One of the primary advantages of crypto is its ease of transfer without needing a third party, making it an invaluable asset for people without access to or trust in traditional banking systems – such as journalists or political dissidents living under oppressive regimes.
Due to crypto’s decentralized nature, it may be challenging to trace your transaction history if you misplace or lose your wallet address – potentially leading to your data becoming exposed or being misused by others with malicious intentions.
Decisions about investing in cryptocurrency will ultimately be personal for each investor; therefore it’s essential that they fully comprehend how these investments are taxed by the IRS before making their choice. While there may be ways to minimize or avoid your tax liability altogether, keeping accurate records and consulting a professional before making their final decision about purchasing crypto assets.