According to the Internal Revenue Service (IRS), most cryptocurrencies are convertible virtual currencies. They can therefore be used in place of real money and serve as a method of exchange, a market of value, a unit of account, and a unit of worth.
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However, there is a lot to understand about how cryptocurrency is taxed because, depending on the circumstances, you might or might not owe taxes. Knowing when you will be taxed is crucial if you own or use cryptocurrencies so that you are not taken aback when the IRS comes to collect it.
Cryptocurrencies on their own are not taxable.
You do not need to pay taxes to own a cryptocurrency; they are tax-free on their own. For taxation reasons, the IRS views cryptocurrency as property, which means:
You must pay taxes if you sell or use bitcoin in a transaction. This is because if its market value has changed, you will incur capital gains or losses.
Cryptocurrency payments made for commercial purposes are subject to taxation as business income.
How Do Cryptocurrency Taxes Operate?
When used as payment or cashed in, cryptocurrencies cause tax events because the IRS considers them to be assets. You may pay taxes on any gain you make when you sell, swap, or use a cryptocurrency that appreciates.
When they are used, and gains are earned, they cause taxable events for the owners. Therefore, the most critical aspect of comprehending crypto taxes is the occurrences that result in the taxes.
How Much Crypto Tax Am I Owed?
The amount you spend or swap, your income level and tax bracket, and how long you’ve owned the cryptocurrency you spent will all affect how much tax you owe on it. For instance, if you’ve had it for less than a year, you’ll owe taxes at your standard income tax rate, and if you’ve had it for more than a year, you’ll incur capital gains taxes.
How Can I Avoid Cryptocurrency Taxes?
Other than not using your cryptocurrency, there are no legal ways to avoid paying taxes. If the value of your cryptocurrency increases, you will eventually have to pay taxes when you sell it, use it, convert it to money, exchange it, or trade it.
Investing in cryptocurrencies by purchasing or selling them
The acquisition of cryptocurrencies is not in and of itself taxed. Even if the value of your stake rises, you can buy and retain Bitcoin for as long as you’d like without paying taxes on it.
When you sell, trade, or dispose of your cryptocurrency investments in any way that results in you realizing a profit in your taxable accounts, taxes are owed. If you trade cryptocurrencies in a tax-deferred or tax-free account, such as an individual retirement account, this rule does not apply to you (IRA).
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