Paying Taxes on Cryptocurrency

What you should know

If you currently invest in cryptocurrency or are thinking of doing so, one aspect to consider is the tax ramifications. Whenever you sell crypto, if you make a profit, the IRS will want its cut.

If you sell crypto and make a profit, you are required to pay capital gains taxes. This is true whether you personally bought the asset or you received it in exchange for something. From the viewpoint of the IRS, how you acquired the crypto doesn’t matter. If you made money when you sold it, you have to pay taxes.

If you received the crypto for work that you did or in exchange for goods or services provided, then you will need to calculate the fair market value when you acquired it. To make your life easier in the long run, you might want to record the date and value. When it’s time to sell, use this information to calculate the taxes owed when you sell.

If you exchange your cryptocurrency instead of selling it, this can still be considered a taxable event. The IRS may consider this as income; if so, you may have a higher tax rate.

If you are using your crypto to buy another asset, whether another type of cryptocurrency or another type of investment vehicle, you could lower your tax bill if you make sure that the two transactions approximate each other in value. You can also try to time your purchases and sales to minimize taxes owed.

Retirement accounts provide tax benefits. Thanks to how popular cryptocurrencies have become recently, some retirement accounts allow direct investments in crypto or allow you to buy ETFs or companies that are related to crypto.

While an IRA or 401(k) will allow you to invest with pre-tax income, your profits will be taxed. With a Roth IRA, you will avoid paying taxes on gains, but you’ll have to invest with money that’s already been taxed.

The wash sale rule applies to many investment classes, such as stocks, bonds, ETFs, and mutual funds. As of the end of 2021…

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