It doesn't matter whether you invest it in Bitcoin, Ethereum, Tether, or any of the thousands of cryptocurrencies in existence. Those investments have tax implications.
Thanks to crypto's decentralized nature, many people incorrectly believe they don't have to pay taxes on gains. But that's not the case, and many of those individuals have a rude awakening come tax season.
The IRS views cryptocurrency as a piece of property. Therefore, buying and selling it is no different from buying a house or stock. This crypto tax guide will give you a quick breakdown of what you need to know about your tax responsibilities when investing.
When Do You Need to Pay Taxes?
Your tax duties begin when you exchange crypto, not buy it. Buying cryptocurrency doesn't come with any tax responsibilities. As long as you keep it in your personal wallet and don't touch it, you will not owe anything come tax time.
But that changes whenever you sell the crypto or use it to pay for goods and services. Any exchange is considered a "taxable event." Even if you sell one coin to buy another, that activity will have tax implications.
The taxable value of virtual currencies is based on capital gains and losses. How much you'll need to pay depends on how much value your crypto holdings gained or lost during a specific period. Generally, you'll report the amount you earn for an exchange. For example, you might buy a coin for $100 but sell it for $500. Your capital gain would be $400, which you would report to the IRS.
Reporting can get complex. An in-depth crypto tax guide will detail long-term capital gains, possible deductions, and applicable tax rates.
The most important takeaway is that you must be vigilant about record-keeping. Cryptocurrency investments are on the same level as traditional stock investments. You must have records of every exchange to accurately report your earnings as income and avoid potential issues.
Failure to pay taxes on crypto could lead to charges of tax evasion or even money laundering. Despite their decentralized nature, virtual currencies are still assets that require tax reporting.
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