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How is cryptocurrency taxed?

Like any other money gained in a year, profits from crypto must be declared to the tax man, but only if the asset has been sold in that year.

People pass their time at a cafe which has dozens of screens showing the latest trends and prices on various cryptocurrencies for their crypto investors' customers in Nakhon Ratchasima, Thailand.

The tax system cryptocurrency falls under is the same as that for stock trading: capital gains tax. How much tax you pay depends on multiple factors, such as when crypto is sold and how much you or your family earns in a year. The process is fairly simple, and there is a wealth of support online to facilitate an easy declaration.

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Simply put, a capital gain is any money made on an investment, cryptocurrency or otherwise. For example, if you made a $100 investment, and you cashed out once it grew to $110, the capital gain would be $10.

There is no capital gain until an asset is sold, which is a loophole the super-rich use to payoff loans without having to pay income tax.

How to calculate capital gains

The most important individual factor for how much tax you pay on a capital gain is how long in the past was the investment was made. If an asset has been held for over a year, then you pay less tax on the asset, compared to a short-term investment of under a year.

For example, a single person earning up to $40,400 a year will not pay any tax on a realized capital gain of an asset that was held fro more than a year. For a detailed table of the amount of tax paid on long-term investments, Forbes has the perfect tool for you.

Short-term investments are counted as ordinary income for the purposes of taxation. These gains are simply added to your income for the year, so are generally not advised to sell due to the possible tax implications.

What help is available?

The Internal Revenue Service (IRS) has two useful forms to assist in calculating your assets.

  • Form 8949, which is your opportunity to declare sales of capital gains. This is very important for declaring assets that have been held for long or short lengths of time.
  • Form 1040, this form is used to declare how much your capital gain is as a raw figure. 

This is particularly important as the tax filing season in the US has just opened. Failure to file correctly will lead to a delay in receiving your tax results.

What if I lost money with cryptocurrency investment?

While on paper any loss of investment will hurt, the loss, called a capital loss, can be used to offset against your taxes. This means losses can be played off against short-term capital gains, which could lead to paying no tax at all, as a loss basically equates to a tax reduction. This is why filling in both IRS forms is so significant.

Make sure you are aware of all investments made and keep up to date records.


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