Bitcoin taxes: What you actually owe the IRS when you sell
If you own a cryptocurrency like Bitcoin, and you’re ready to sell it, you need to know how that might affect your yearly taxes.The selling part is easy.If you have an account with a major exchange or a bank like SoFi, you have many options for how you want to execute a trade and what to do with the proceeds.
These apps will also generate your year-end tax forms (generally a Form 1099-DA) to make it easy to calculate exactly what you owe.Bitcoin and other cryptocurrencies are treated as digital assets, which the IRS describes as “any digital representation of value that is recorded on a cryptographically secured distributed ledger, or any similar technology.” As assets, selling them makes them subject to capital gains taxes, rather than adding to your taxable income.Capital gains tax is, as the name implies, a tax on the gain in value between when you bought an asset and when you sold it.(For simplicity’s sake, we’re going to focus on Federal taxes, though many of these insights apply to state taxes as well.)Let’s say you bought some Bitcoin for $1,000.
That amount of crypto doubled in value, and you decide to sell the entire stake for $2,000.You will only pay taxes on the gain of $1,000.
The other $1,000 you paid for the Bitcoin is your cost basis.In the U.S., capital gains are taxed differently from income depending on how long you own the asset. If you held that Bitcoin for less than a year, your gain is considered short-term, and the $1,000 profit will be taxed as part of your income for the year.If you also happen to have a lot of income from other sources, you will also be subject to the Net Investment Income Tax, which adds another 3.8% onto your tax bill.If you have owned your Bitcoin for 366 days or longer, however, you pay long-term capital gains, which is between 0%, 15% and 20%, depending on your income level.
Of that $1,000 profit, you might own nothing, or at most $200.What happens if you bought Bitcoin for $1,000 and, by the time you...