Because yes, you must to stay on the good side of the IRS.
They say there are two sure things in life, one of them taxes. Unfortunately, nobody gets a pass — not even cryptocurrency owners.
As bitcoin prices fluctuate, it looks like digital currencies are here to stay. But it’s increasingly falling under the purview of the taxman. After years of trying to categorize bitcoin and other assets, the IRS decided in March 2014 to treat cryptocurrencies as property.
That ruling comes with good and bad. On one hand, it gives cryptocurrencies a veneer of legality. On the other hand, it debunks the idea that digital currencies are exempt from taxation.
As you might expect, the ruling raises many questions from consumers. Does the IRS really want to tax crypto? Is anybody paying taxes on their bitcoin and altcoins? And how do you calculate crypto taxes, anyway?
The truth about cryptocurrency taxes
The IRS reports only some 800 to 900 Americans filed taxes on property “likely related to bitcoin” in the years 2013, 2014 and 2015.
But the government is tempted by all that activity it’s hearing in the cryptocurrency echo chamber. And it’s looking to tease out the taxes that come with crypto transactions.
WHICH IRS FORM DO I USE FOR CAPITAL GAINS AND LOSSES?
Use IRS Form 8949 — Sales and Other Dispositions of Assets. https://www.irs.gov/forms-pubs/about-form-8949
Calculating your crypto taxes takes just three steps
1. Find out how much you made selling crypto.
To find your total profits, multiply the sale price of your crypto by how much of the coin you sold.
If you have 2 bitcoin and the selling price is $10,000, then the total sale amount is $10,000 x 2 = $20,000.
Next, subtract how much you paid for the crypto plus any fees you paid to sell it. (In tax speak, this total is called the basis.)
Finally, you’ll get what’s known as a realized gain — your profit after you sell.
Total sale amount – basis = realized gain
REALIZED GAINS VS. UNREALIZED GAINS: AN EXAMPLE
You buy 1 bitcoin (BTC) for $10,000. In a week, it shoots up to $18,000. You’ve made $8,000, but only on paper.
Because you haven’t sold your bitcoin yet, this is an unrealized gain. And unrealized gains aren’t taxed.
The following week, however, your bitcoin is worth $15,000. You sell it for a profit of $5,000. Your $5,000 profit is a realized gain, which means you’ll pay taxes to the IRS on it.
2. Figure out whether you have a short-term or long-term gain.
Find the date on which you bought your crypto. Then glance at your calendar and note today’s date.
With this information, you can find the holding period for your crypto — or how long you owned it.
You can also figure out if you have a short-term or long-term gain:
You have a short-term gain if you held your crypto for one year or less.
You have a long-term gain if you held your crypto for longer than one year.
Your tax rate ultimately depends on the type of gain you’ve realized.
3. Calculate your taxes.
If you have a short-term gain, the IRS taxes your realized gain as ordinary income. Accordingly, your tax bill depends on your federal income tax bracket.
2018 federal income brackets:
SHORT-TERM GAIN: AN EXAMPLE
You’re a single filer who makes $30,000 a year, which means you’re in the 12% tax bracket.
You buy 1 BTC on January 1, 2017, and sell it for a $500 profit on March 1 of the same year.
That’s a short-term gain, so you owe $60:
$500 x 12% = $60
If you have a long-term gain, you’ll pay a capital gains tax rate on your crypto profit. You’ll likely also see a smaller tax bite.
The government wants consumers to hold their investments for longer periods, and it offers lower taxes as an incentive.
There are three tax brackets for long-term capital gains: 0%, 15% and 20%.
2018 Capital Gains Tax Rates
LONG-TERM GAIN: AN EXAMPLE
You’re a single filer who makes $70,000 a year, which means you’re in the 15% tax bracket for long-term capital gains.
You buy 1 BTC on January 1, 2017, and sell it for a $2,000 profit on February 1, 2018.
This is a long-term gain, so you owe $300:
$2,000 x 15% = $300