Tax law can easily make your head spin. When you add cryptocurrency to the mix, it can get even more confusing. But it’s important to know how cryptocurrency taxes work to avoid getting in trouble with the IRS.

We’ve put together a few things you should consider to help you determine if you should pay tax on your cryptocurrency.

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Should You Worry About Crypto Taxes?

Understanding what kind of crypto transactions are taxable can be confusing. Generally, if you make money with your cryptocurrency, you have to share some of your profits with the IRS. Below are some questions to ask yourself to help you determine if you have a taxable event.

  • Did you sell cryptocurrency for profit in 2022?
  • Have you mined crypto?
  • Have you received cryptocurrency in exchange for goods or services?
  • Have you made purchases with your cryptocurrency?

If you answered yes to the questions above, you most likely have a taxable event. But let’s say you bought Bitcoin last year, and you’re still clinging to it. If you don’t sell or trade it in any way this year, you won’t have to worry about taxes. It’s a good idea to consult your CPA or tax advisor to learn more about how certain transactions may affect your taxes.

What you need to know about crypto taxes

In the eyes of the IRS, cryptocurrencies such as Bitcoin and Ethereum is considered a property type instead of a currency. You will have to pay taxes on crypto just like you do for stocks and other types of property. Here are some taxable situations you may encounter:

  • If you are a crypto miner, your crypto is considered taxable income, even if you don’t sell it. Your crypto mining taxes are based on the fair market value of the cryptocurrency when you receive it.
  • Selling or trading cryptocurrency creates a taxable event if the realized value of your crypto is greater than what you originally paid.

Your broker or exchange must send you Form 1099 during tax time. This will give you an overview of your capital gains and losses so you can complete IRS tax form 8949. If you do not receive a form during tax time, you are still responsible for reporting your crypto transactions to the IRS.

What are the crypto tax brackets?

You will have to pay short-term or long-term capital gains taxes if you make money from crypto. Your taxes on crypto gains depend on how long you held your crypto before disposing of it.

Short-term capital gains rates – ranging from 10% to 37% – are the same as the rates you would pay on income you earn while working. These short-term crypto tax rates apply to day traders and other investors who sell their cryptocurrency within a year of acquiring it.

Take a look at the tax rates below on short-term crypto capital gains before you sell.

Only

Married Filing Jointly

head of household

ten%

$0 to $10,275

$0 to $20,550

Up to $14,650

12%

$10,276 to $41,775

$20,551 to $83,550

$14,651 to $55,900

22%

$41,776 to $89,075

$83,551 to $178,150

$55,901 to $89,050

24%

$89,076 to $170,050

$178,151 to $340,100

$89,051 to $170,050

32%

$170,051 to $215,950

$340,101 to $431,900

$170,051 to $215,950

35%

$215,941 to $539,900

$431,901 to $647,850

$215,951 to $539,900

37%

Over $539,900

Over $647,850

Over $539,900

Table source: Author. Data source: IRS.

Let’s say you bought Bitcoin for $40,000 in January 2022, and it goes to $60,000 in December 2022. If you decide to sell in December, you will have a short-term capital gain of $20,000 because you have held your crypto for less than a year. year.

You can circumvent short-term capital gains rates if you hold your crypto for more than a year before selling. The long-term capital gains rates are very attractive, giving you access to preferential tax brackets of 0%, 15% and 20%. A single filer earning up to $40,400 per year in 2022 can take advantage of the 0% capital gains tax rate. If you’re married and filing jointly, you could earn up to $80,800 before having to pay long-term capital gains taxes.

Managing your crypto tax debt

If you have any cryptocurrency transactions during the year, you should talk to your CPA or tax advisor about the potential consequences. Selling, receiving, exchanging, and mining cryptocurrency can all be taxable events. Keep track of all your crypto transactions over the year so you don’t face an unexpected tax bill later.