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Tax rules for Buying and selling Bitcoin and other crypto
When you buy Bitcoin and sell it for a profit you are subject to capital-gains taxes. This is the case whether you buy Bitcoin and sell it for dollars or whether you exchange it for other cryptocurrency for a profit. This is also the case if you buy Bitcoin, it goes up in value and then you exchange the Bitcoin for goods or services.
This critical determination meant that crypto-trading profits will be treated similar to stock-trading profits, as stock and crypto are both considered property for tax purposes. Treating crypto profits like stock seems straight forward enough, but the rules are not so clear for Bitcoin and other cryptocurrency, since crypto can be purchased with dollars, go up or down in value and then be exchanged to buy a Tesla, pizza or even withdrawn for cash at a Bitcoin ATM. These exchange outcomes are not common in stock trading, and as a result the rules for crypto taxation are confounding.
Like a stock portfolio that you personally own, you will need to track the value of the crypto you buy, and then you’ll also need to track the value of crypto when it is sold or exchanged. For example, if you bought Bitcoin for $30,000 and then sold it in exchange for $50,000, you'll have a gain of $20,000. This gain is subject to tax at either short- or long-term capital-gains rates depending on how long you held the Bitcoin. If you held the Bitcoin for more than one year, you get preferred long-term capital-gains rates of 0-20%. Essentially, the long-term capital-gains tax rate is 0% for low- to middle-income earners (generally less than $40,000 if single, $80,000 for married couples) is 15% for middle- to high-income earners (generally income up to $441,000 if single, $496,000 for married couples) and is 20% for high-income earners (generally income in excess of $441,000 if single, $496,000 for married couples).
When you buy and then sell Bitcoin or other cryptocurrency for a loss, you are entitled to a tax loss. Losses can occur when selling crypto at a loss and when exchanging crypto for other cryptocurrency or goods or services at a loss. Losses from one crypto trade or exchange can be used to offset other crypto gains. Short-term crypto losses can offset short-term crypto gains, and long-term crypto losses can be used to offset long-term crypto gains. Crypto losses can also potentially be used to offset gains from stock or mutual funds. If crypto losses exceed crypto gains, as well as stock, ETF and mutual fund gains, then up to $3,000 of the loss can be used to offset other income such as wages or self-employment income. Any losses that cannot fully be used against income in the year incurred can be carried forward to future years and netted against future crypto or stock-trading gains.
Cryptocurrency mining and staking income is ordinary income for tax purposes. Cryptocurrency mining, and its staking counterpart, is a service that computers provide to a cryptocurrency blockchain network. The owners of these computers typically receive cryptocurrency from the network in exchange for their services. So, for example, if I owned computers that provided cryptocurrency mining or staking, then I would typically receive crypto in exchange for these services and would pay tax on that crypto to the IRS. The payment in crypto is taxable income just the same as if I were paid in dollars to perform these same services to the network.
The value of the crypto when it is received is the value to be used for tax-reporting purposes. If the value of the crypto increases after it's received, then you will pay capital-gains tax on the increase of value when the crypto is later sold or exchanged. So, for example, let's say you received Bitcoin worth $1,000 for crypto-mining services and that this crypto then increased in value and three months later was sold and traded for $1,500. The first $1,000 would be taxable as ordinary income. This income will be subject to regular income-tax rates, which range from 0-37%. The $500 increase in value in the Bitcoin after it was earned will be treated as capital-gain income.