How Much Tax Do You Pay On Cryptocurrency?
Since cryptocurrency is more of a modern addition to the financial environment, there numerous questions about the different rules, regulations, and general things to know. One big thing that people might not think about is taxation. Specifically, how much tax is taken out of your cryptocurrency trading?
How Crypto Works:
Cryptocurrency is unique in what it’s regarded as. It’s a new asset class that isn’t quite like any of the existing currency, gold, or commodity groupings. The IRS says that it’s taxed and considered “property”, AKA, it’s taxed like stocks. This is arguably the best-case scenario for the virtual currency, especially for those who are into long-term investing.
This tax blog notes, “Because every trade or sale is a taxable event, it is common for cryptocurrency traders to have hundreds, if not thousands of transactions to report. Every transaction must be itemized and reported.”
If you hold an asset for less than a year, it’s typically reported on the short-term section, and anything longer than that would respectively go in the long-term section. Generally, long-term gains are supposed to be taxed at favorable rates, depending on the asset.
Crypto Taxation:
According to Forbes, that means that for federal taxes, you’ll be paying a 15% tax on any gains unless you make lots of money. For instance, if you make more than $479,000 (for married couples) or $425,800 (for individuals) you’d be paying a 20% tax. But generally, this compares quite well to other alternative methods of investment, which is why many tend to favor it.
Crypto Comparison:
Collectibles. This includes things like gold, for example. No matter how long you have it or when you sell it, the absolute lowest tax you’ll pay is 28%. This doesn’t change for any reason, even if you’re doing gold exchange trading funds or something like that.
Currency. This form of tax is what you’re most used to, as it’s per the regular income rates on any and all gains, which can be up to 37% on federal taxes. Unfortunately, there’s no way to qualify for long-term capital gains with currency, so it doesn’t matter how long you hold your currency investments.
Commodities. The taxation of commodity futures is pretty complicated and relies on Section 1256 contracts, which means two things.
If an investment is marked to market at the end of the year, you’ll owe taxes on all paper profits even if you don’t sell.
Regardless of how long you’ve held the commodities, 60% of any gains are considered long-term gains and 40% short term gains, meaning that you’ll get some sort of blended tax rate. For example, someone in the highest federal income tax bracket would have to pay 26.8% in taxes on commodities.
The way these forms function tend to kill off long-term investments and investors. However, when paper profits are concerned, Section 1256 contracts can be worthwhile as the 26.8% tax rate is less than short-term capital gains tax rates.
— For more information about commodity taxation, check out this Forbes piece. —
The gist is, cryptocurrency doesn’t really fit with any of these alternate investment strategies, which is why it has its own bracket. This ends up in an investor’s favor because of the high rates and rules relating to commodities, collectibles, and currency.
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