The idea of cryptocurrency is undoubtedly fascinating, and another milestone achieved where the money transactions could also be digital. Yes, you heard me right! A cryptocurrency is a form of money that is made up of digital data. The files are usually constructed in the same way that cryptography is (the science of hiding information). But where there are transactions, there is taxation.
This article sheds light on this important topic, how taxation works in cryptocurrency. So if you are someone who is trying to find an answer related to the cryptocurrency tax rate or the difference between mining and trading crypto, this is your place!
What is the Cryptocurrency tax rate?
For federal taxes, the cryptocurrency tax rate is the same as the capital gains tax rate. Short-term capital gains are taxed between 10-37 percent, while long-term capital gains are taxed at 0-20 percent in 2021.
Crypto-asset profits in the United States are determined using two factors: your income and the length of time you have owned the coin, popularly known as the holding period.
Your holding period starts the day after you buy a cryptocurrency or conduct a cryptocurrency transaction and expires the day you trade, sell, or send that capital asset. This is where short-term and long-term capital gains enter the picture.
What is short-term and long-term gain?
During the short-term gains, your bitcoin coins will be taxed as ordinary income and subject to short-term capital gains tax if you hold them for fewer than 365 days.
Below is the list of 2021 short-term tax rates released by IRS :
On the other hand, long-term capital gains tax rates apply to coins that have been held for more than 366 days. These are tax liabilities ranging from 0% to 20%, dependent on your ordinary income tax rate.
Here’s the list of long-term tax rates released by IRS:
These taxes are applicable every time you participate in a taxable through cryptocurrency. But, what are the taxable events? Every time you do a transaction through cryptocurrency that may have a chance to trigger profit, it is a taxable event!
Know The Capital Tax gain events!
There are numerous short-term and long-term Capital Tax gain events that fall under the 2021 tax rates:
i. Cryptocurrency is being exchanged for fiat currency (like the pound sterling, the euro, and the US dollar). For instance, you pay $1,000 for two ETH (Ethereum) and then sell them for $700 a few months later. The $300 discount will be deducted from your taxable income.
ii. Purchasing products and services with cryptocurrency. For example, before 2014, you bought five bitcoins for $150 each in a bitcoin transaction. Now, with your newfound money, you buy a brand new BMW for $56,000 using one bitcoin. One bitcoin was worth $56,000 at the time of purchase.
iii. You can also buy goods and services with cryptocurrency. For example, before 2014, you buy five bitcoins for $150 each in a bitcoin transaction. Now, with your newfound money, you buy a brand new BMW for $56,000 using one bitcoin. One bitcoin was worth $56,000 at the time of purchase.
iv. Cryptocurrency can also be used for exchanging one asset for another. It could be done directly between peers or through an exchange. Changing one cryptocurrency asset for another. It could be done directly between peers or through an exchange.
Consider the following scenario: you paid $500 for 10 Litecoin. You exchanged all of your Litecoin for 1 ETH after a few months (Ethereum). 10 Litecoins were valued at $3,000 when you made the trade.
Income tax events
When it comes to Income Tax events, these include –
- Using decentralized finance to earn cryptocurrency interest (DeFi lending)
- An airdrop is a method of receiving cryptocurrency.
- Receiving a cryptocurrency payout in exchange for completing a task (this includes bug bounties)
- Staking and liquidity pools can be used to earn cryptocurrency.
- Transaction fees and block rewards can be used to supplement your crypto mining income.
It is no surprise that Cryptocurrency is a milestone when it comes to digital transactions. But to get good benefits from something, you need to know the “new.” This article sheds light on how you can benefit from this, but if you still have some confusion, a good accountant will be there to your rescue. But no matter whatever you do, be wise when it comes to any sort of transaction! Schedule an appointment.