Taxes

Bitcoin Tax Guide 2022: Crytpo Tax Rules

Heads up, Bitcoin buyers — tax season is coming soon and your investment will likely have an impact. Are you a bit confused about how it works? We’ll explain it all in our easy-to-follow Bitcoin tax guide.

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Unless you’ve known about Bitcoin since its inception, it may seem a little mysterious to you—even if you own some. And that can make things like thinking about Bitcoin and your taxes a bit daunting.

Do You Pay Taxes on Bitcoin?

In short, yes, you have to pay taxes on Bitcoin. If you have purchased Bitcoin and later used it to pay for goods and services, sold it for a profit or if you received the Bitcoin through mining, you’ll owe taxes.

The IRS treats Bitcoin the same way it treats other types of investments. To be precise, the IRS treats all cryptocurrencies as property for tax purposes.

This means Bitcoin is subject to the same capital gains taxes as other property, such as real estate or art. If you earn a profit on the investment, you’ll pay taxes. If you lose money, you can deduct your losses from other investment gains and against your regular income, up to a limit.

Bitcoin Tax Guide: Basic Terminology

The terminology that applies to virtual currency transactions also applies to other transactions. If you’ve ever sold a home and had to pay taxes because of it, you’ve heard some of these terms.

The first is capital asset. This is anything you own, including stocks, bonds, your home, and your cryptocurrency. The basis is the amount you paid to purchase the property, including any fees you paid.

Capital gains and losses are the profit or loss you can make on the property. These gains or losses are unrealized when they’re still just on paper. When you actually sell the property, though, the capital gains or losses become realized, and that’s when they have tax implications.

Short-term gains are realized gains on any investment you held for less than a year before selling. Long-term gains are realized gains on assets you’ve held for more than one year before selling. These are important because they’re taxed differently.

Is all of this as clear as mud? Here's a quick tutorial to illustrate the terms:

Let’s say you buy one Bitcoin for $10 (yes, I know, that’s now impossible). You pay a $1 fee during the purchasing process. That means your basis is $11. One year later, Bitcoin is worth $100. If you hang on to it longer, you have an unrealized capital gain of $89. After another year, it’s worth $189, and you sell the Bitcoin. You now have a realized long-term capital gain, which is now taxable.

Related: Best Tax Software for Investors

Get Your Information Together

When it comes to filing taxes for anything, it’s really all about having the right information available when its time to file. For Bitcoin and other cryptocurrencies, the information you need includes:

  • The basis (cost plus fees) of any Bitcoin you buy
  • The purchase date
  • If sold, the date you sold it
  • The price you sold it for

As you can see, keeping good records of cryptocurrency transactions is essential. This is one reason many people use the same cryptocurrency exchange option, so the records are easy to dig up.

Using this information, you can figure out how much tax you’ll pay on your Bitcoin. This is also a helpful exercise to walk through Bitcoin. You’ll want to know what taxes will look like before you make the decision to sell.

One Major Difference to Note

One weird quirk about Bitcoin is that you technically sell it even if you’re using it to purchase something directly. When you pay for something using Bitcoin, the IRS treats it as if you sold your Bitcoin for cash and then used the cash to make a purchase.

This means you’ll need to pay taxes on the Bitcoin you sold, even if you technically used it to purchase something.

And, yes, this is true even if you’re shopping somewhere like Overstock.com, which directly accepts Bitcoin as a method of payment. Because cryptocurrency isn’t considered legal tender in the U.S., all Bitcoin transactions trigger potentially taxable events.

For this reason, you want to keep track of more than just bought and sold dates if you’re using cryptocurrency for everyday transactions. You’ll also need to keep track of when you use the Bitcoin and what its value is when you happen to use it.

Something similar can happen if you use physical property during a transaction. But it’s less common to do this with other types of property versus cryptocurrency. So be sure you keep incredibly detailed notes about when you buy, sell, or just use cryptocurrencies like Bitcoin.

How Much Is the Tax on Cryptocurrency?

If you’ve triggered taxable events with your Bitcoin this tax year, your taxes will depend on the circumstances and your personal tax bracket. Here’s how it works:

Taxes on Long-Term Capital Gains

This is the best case scenario. Long-term capital gains are taxed at a lower rate than your actual income tax, but the rate depends on your tax bracket.

Long-term capital gains taxes used to work based on your tax bracket. That’s no longer the case. Now, you’ll pay either 0%, 15%, or 20% on long-term capital gains, depending on your maximum taxable income level. For instance, single taxpayers making up to $41,675 will pay no long-term capital gains taxes. Single taxpayers making between $41,676 and $459,750 will pay 15%, and single taxpayers making over $459,751 will pay 20%.

In short, the majority of taxpayers will pay 15% on long-term capital gains. But you may pay more or less depending on your income.

So if you do a pure buy-hold-sell transaction on Bitcoin, it’ll work like this. Say you buy a Bitcoin for $1,000 on January 1, 2020. You sell it for $2,000 on January 1, 2021. Your capital gain would be $1,000, and you’d pay either $0, $150, or $200 in taxes on the sale come tax season.

Taxes on Short-Term Capital Gains

What if you buy Bitcoin and only hold it for six months, or even 364 days? If you sell it for a gain, that’ll be taxed as a short-term capital gain. Short-term capital gains are considered regular income, so they’re taxed at your regular income tax rate. So if you’re in the 24% tax bracket, you’d pay $24 on a $1,000 short-term capital gain.

What About Losses?

If you lose money in a cryptocurrency transaction, you can deduct the loss on your return. It’s possible to deduct capital losses even if you just take the standard deduction. The amount of the deduction depends on your tax bracket. You can deduct your losses against other investment gains without limit. If you’re deducting losses against your regular income, you can only claim up to $3,000 per year in capital loss deductions. You can carry unused losses forward to deduct against income in future years, but it’s still important to keep that in mind when you’re considering selling bitcoin at a loss.

What About Transactions?

All of this can seem more confusing when it comes to using Bitcoin or other cryptocurrency to actually make a purchase. But it’s actually fairly straightforward. Let’s say you buy a coin for $1,000. Then you use it to purchase $2,000 worth of kitchen remodeling goods on Overstock.com. That transaction will trigger a capital gains tax on $1,000 worth of capital gains.

Why? Because it’s as if you sold the coin for $2,000 and then turned around and bought something with the resulting cash. Again, this is the case even if Overstock accepts cryptocurrency directly.

Related: Best Bitcoin Debit Cards

It’s similar to cashing out stock and then using the resulting money to purchase something. The IRS doesn’t really care what you do with the money you get. They just want you to pay taxes on the gain.

A Couple More Scenarios

Cryptocurrency offers a couple of other interesting scenarios to consider from a tax perspective. One is mining coins. When you mine a new coin, it’s considered income according to the fair market value of the coin on the day you mined it. So you’ll count this as another type of income on your taxes.

When you receive payments in cryptocurrency, that also counts as income based on the fair market value of the currency on the day you get paid. And when you exchange one coin for another, it triggers taxable events just like using cryptocurrency to buy goods. It’s like you sold the currency for cash and then used the cash to purchase more currency.

Why Should I Care?

Some people are migrating towards Bitcoin and other cryptocurrencies because they’re interesting and maybe a good investment. Others are migrating this way because they believe less government oversight is a good thing. Regardless of why you’re using or investing in Bitcoin, you should care about the tax implications.

The IRS is paying close attention to cryptocurrency users now, after the vast majority haven’t paid taxes on their crypto transactions. Failure to pay your taxes involves potentially steep penalties and fees

Unless you’ve known about Bitcoin since its inception, it may seem a little mysterious to you—even if you own some. And that can make things like thinking about Bitcoin and your taxes a bit daunting.

Abby Hayes

Abby Hayes

Abby is a freelance journalist who writes on everything from personal finance to health and wellness. She spends her spare time bargain hunting and meal planning for her family of three. She has a B.A. in English Literature from Indiana University Purdue University Indianapolis, and lives with her husband and children in Indianapolis.


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