If you’ve purchased cryptocurrencies and they’ve thus far just sat quietly in their digital wallets, then no taxes are due on them. You only owe taxes on assets which you sell, and you could honestly hold these assets in perpetuity while incurring no tax as long as you don’t exchange them for fiat currency, goods, or any other coins or tokens. By continuing to hold on to your investment for the long haul, you’ll also be able to enjoy a reduced tax rate, because cryptocurrencies are taxed as property, and more favorable long-term capital gains tax rates apply here. However, if you sell your investments before the one year mark, all of your gains on that investment will be taxed at your regular income rate.
You Swapped Your Cryptocurrency For Another Cryptocurrency
Many investors seem to be confused about this one, but swapping your coins or tokens for another asset does count as a taxable event. This means that if you swap your Bitcoin for Ethereum, whatever gains you made on your Bitcoin before selling it are taxable. Some people get into trouble here, because they think they’re safe as long as they stay in cryptocurrency and don’t cash out to their native fiat currency, but this is not true. If you’ve purchased Bitcoin and then immediately swapped it for another token that you wanted to buy, then it’s likely that there’s nothing to report, but if you’ve been holding on to it for a while, you’ll need to do the math and see what you owe Uncle Sam.
You’ve Been Swing or Day Trading Cryptocurrencies On An Exchange
If you’ve been actively trading your cryptocurrencies on an exchange, then good records are extremely important as you’re going to have to report every single transaction to the IRS. It’s also important that you be extremely careful here. Many cryptocurrency traders wound up owing money to the government that they could not pay because they made one fatal mistake.
These traders managed to make huge gains on the last bull run, easily tripling the value of their portfolios. Unfortunately, they quickly liquidated these assets, triggering a taxable event, and then immediately invested all of their gains back into other coins or tokens. Once the crash happened, they were left with only a fraction of their original gains. However, they were also horrified to find that they still owed a massive amount of money to the IRS.
Since the original investment was cashed out at a profit, taxes on those gains were due immediately. The lesson in this story? Stash what you need for your taxes in fiat currencies to save yourself a lot of stress. While you can report cryptocurrency losses for a write-off, the amount that you can report is limited, and it will not cover this kind of mistake. So, tread lightly here.
You Purchased Something Directly With Cryptocurrency