As tax season approaches, you’re likely wondering how to report your investment in cryptocurrencies. Your accountant might not know how to do this, and the IRS’s 45-part FAQ on “virtual currencies” doesn’t make it any easier. Don’t worry, Ryze is here to help.
How do cryptocurrency taxes work?
Crypto-assets such as Bitcoin and Ethereum are considered property, not currency. They’re taxed the same way as your investment in stocks or real estate. You are required to report a “capital gains” or “capital loss” on every taxable event.
What is a taxable event for crypto?
If you’ve done any of the following in 2019, you have a taxable event that you must report:
Selling your crypto for national currency (EX: Selling Bitcoin for USD)
Exchanging one crypto for another (EX: Selling Bitcoin and Buying Ethereum)
Using cryptocurrency to pay for goods or services (EX: Buying gift cards on Bitrefill)
Earning cryptocurrency as income
Here are examples of crypto transactions that are not taxable events:
Buying crypto for USD (simply buying crypto isn’t a taxable event because you only realize a gain or loss when you sell)
Transferring crypto from one wallet to another (the IRS doesn’t tax you for moving your money around, but converting between cryptos is a taxable event)
Receiving crypto as a gift
How to determine capital gains or losses
Now that you understand which events you need to report, let’s determine whether those events are losses or gains. At a high-level, there are two steps: first, determine the cost basis for your investments, and then subtract that from the fair market value.
Cost basis is how much money you invested. If you bought 0.5 BTC at $10,000/BTC, your cost basis is $5,000 plus any fees associated with the purchase.
Fair market value is the current value of your investment. If the current price is $12,000/BTC, your 0.5 Bitcoin is worth $6,000.
If the fiat market value is higher than your cost basis, you have a capital gain. In this example, you have a capital gain of $1000, as the cost basis ($5000) subtracted from the fair market value ($6000) leaves $1000.
If the fair market value is lower than your cost basis, you have a capital loss.
Determining your cost basis gets more complicated when dealing with crypto-to-crypto trades. You must calculate the cost of your purchase in USD.
For example, if you bought 1 ETH with Bitcoin at 0.075 BTC/ETH, and BTC was $10,000 at the time, then your cost basis is $750.
Determining your Tax Rate
The tax rate you pay on any given taxable event depends on two factors:
Length of investment: short-term vs long-term capital gains
Your income tax bracket
Capital gains are reported as either short-term or long-term. If you’ve held your investment for longer than one year, you pay long-term capital gains. If you held your position for less than one year, you pay short-term capital gains.
Short-term capital gains are taxed at the same rate as income, meaning you pay the marginal tax rate for your income tax bracket. The table below breaks down the marginal tax rate for different income levels.
Long-term capital gains are either 0%, 15%, or 20%, depending on your income bracket. Refer to the tables below to determine your tax rate long-term capital gains.