Cryptocurrency’s popularity continues to rise as coins such as Bitcoin, Etherium, and alternate coins like Dogecoin and Shiba Inu coin continue seeing their prices trend higher.
For many across the country, cryptocurrency turned into an investing alternative, one where investors can buy and sell at any time of the day and watch their money multiply throughout the year.
While some have flocked to crypto to see their investments increase, others prefer the coins over mainstream investments because cryptocurrency is decentralized. Yet, the IRS still looms overhead, looking to crack down on crypto tax compliance. So as investors or potential investors, what do you need to know about how your cryptocurrency is taxed? In this post, we’ll cover the most important information regarding cryptocurrency tax rates in 2021.
Any time a taxable event occurs to your cryptocurrency investments, you are obligated to report them on your taxes. Any event in which you gain profits is considered a taxable event. Regarding cryptocurrencies, these events fall under two categories: capital gains tax events and income tax events. However, these two events are taxed differently so understanding their differences is necessary.
Capital gain tax events go as followed:
Income tax events:
Cryptocurrency’s tax rate for federal taxes is the same as the capital gains tax rate. In 2021, that rate ranges from 10-37% for short-term capital gains and 0-20% for long-term capital gains. The United States calculates crypto-asset gains through two factors: your income and your holding period (how long you have held the cryptocurrency).
A cryptocurrency’s holding period begins the day after the asset is purchased and continues until you trade, sell, or send the asset elsewhere. Differentiating between short-term and long-term capital gains depends on how long you held the asset before selling it.
If your crypto has a holding period of 365 days or less, they will be taxed as ordinary income and subject to the short-term capital gains tax. However, coins with a holding period of 366 days or more will be subject to long-term capital gains tax rates. The rates vary based on your income and filing status.
The cryptocurrency tax rate is based on a 2014 IRS ruling that states that all crypto should be treated as a capital asset, just like stocks and bonds. It is not treated like a fiat currency. That means that you need to pay taxes whenever you sell your asset at a profit. Any transaction to take part in with your crypto, if the amount you spend has increased in value over what you paid for it initially, you will be taxed.
If you incur a loss, you don’t owe any taxes on that transaction, though you still need to report these losses when filing. Capital losses for crypto may actually be beneficial for the sake of tax savings to offset any capital gains.
We know that taxes are confusing and filing them on your own sucks away too much of your time. So why should you worry about what information you need to include in your taxes when a CPA or EA can do the work for you? At Taxfyle, a dedicated Tax Professional is just moments away from taking the stress out of taxes.
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