February 2, 2022 24K-Production / iStock.com
Millions of Americans now own and use cryptocurrency , which has taken an incredible journey from the fringes of the investing world to the mainstream.NFTs are still in their infancy, but they exploded in popularity last year as well, as investors and collectors made their moves on what promises to be the next big thing in collectible investing.
More people than ever are now aware of crypto and NFTs, but far fewer know what owning and trading them means for their taxes.If you dealt with either of these exciting digital investments in 2021, here are a few things you need to know for tax season.
Also Find: Cryptocurrency Predictions for 2022 Do You Owe Taxes for Crypto Transactions? That Depends
More than one in 10 Americans traded crypto in 2021, according to Coinbase, and many of them will see their taxes impacted as a result.In America, crypto is considered a digital asset, which the IRS treats the same as capital assets such as stocks and bonds.Similarly, any gains you earn from crypto will be taxed at different rates, depending on whether the IRS treats those earnings as income or capital gains.Save for Your Future In Some Cases, Crypto Is Taxed as Income
When cryptocurrency transactions are treated as income, they’re taxed at the same rate as any other income you earn based on your tax bracket and filing status.Here are a few common situations where crypto is taxed as income: Mining crypto: You’ll owe taxes on any crypto you mined based on the fair market value of that crypto at the time you mined it.If you mine crypto as a business, you’ll pay tax on what you earn as self-employment income.
Receiving payments as crypto: If an employer paid you in crypto or you received crypto as payment for contract work, or if you sold something taxable and were paid in crypto for the exchange, it will be taxed as income according to your tax bracket.Specialty transactions: You’ll have to pay income taxes on any crypto you received through a hard fork, an airdrop or staking rewards or as an incentive or reward.Other Times, Crypto Is Taxed as Capital Gains
Like most assets, crypto is taxed differently depending on whether you hold it for more or less than one year.Long-term capital gains are taxed at a rate of 0%, 15% or 20%, depending on your income.
Short-term capital gains are taxed at the same rate as your income — a rate that is higher and less advantageous.Wealthy investors also pay a 3.8% Net Investment Income Tax.As with traditional investments, capital losses can be used to offset capital gains.Save for Your Future
In the following situations, crypto will be taxed as capital gains: Selling crypto: If you owned crypto as an investment and sold it for cash, you’ll have to pay a capital gains tax.Spending crypto: According to Coinbase, the IRS treats spending crypto the same way it treats selling it — as a taxable transaction.That’s because you technically have to sell the asset before it can be exchanged for goods or services.
Converting crypto: If you use Ether to buy Bitcoin or conduct any other crypto-to-crypto exchange, the IRS considers it a taxable event — here, too, because you technically have to sell crypto to exchange it for something else.
NFT Hype: Have We Reached Peak Investor Interest? Not All Crypto Events Are Taxable
Now that you know about the most common crypto transactions that are treated as taxable events, it’s important to know that some crypto transactions aren’t subject to taxation at all.
If you use money to buy crypto and hold it, it’s a non-taxable event because any gains or losses are unrealized.That all changes when you sell.
Donating crypto is a non-taxable event, as is receiving crypto as a gift or giving it as a gift, up to $15,000.You also won’t be taxed for transferring crypto to yourself from one wallet or account to another..
