It ultimately comes down to one question: how long did you hold the virtual currency?
According to the IRS, virtual currency transactions are taxable by law just like transactions in any other property. Taxpayers transacting in virtual currency may have to report those transactions on their tax returns, especially if they receive a tax form related to the transactions.
Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies. But how do you pay taxes on virtual currency?
It ultimately comes down to one question: how long did you hold the virtual currency? Did you have diamond hands and HODL or did your paper hands fold? If you hold the virtual currency for more than a year, it’s taxed as a long term capital gain rate. However if you hold the virtual currency for 364 days or less, it’s taxed as a short term capital gain. For single filers, the capital gains tax rate is 0% if you earn up to $40,400 per year, 15% if you earn up to $445,850 and 20% if you make more than that. Short term gains are taxed as ordinary income, anywhere from a rate of 10% to 37% based on the taxpayer. Investors who sold or exchanged their crypto at a loss can use their losses to lower their taxable income by a maximum of $3,000. Any additional losses can be carried over to future years.
Despite the preconceived notion that cryptocurrency is anonymous, it really isn’t when it comes to reporting to the IRS. It is generally the best practice to report all income to the IRS, but this cannot be stressed enough if you receive a tax form regarding the sale of your virtual currency. Failure to correctly report could result in an audit and an unwanted tax bill.