Bitcoin, Ethereum, Litecoin, and other cryptocurrencies have seen dramatic price increases this year. Have you thought about cashing ter? Are you wondering how will you be taxed?
Cryptocurrency is a Capital Asset
The IRS has clearly stated that cryptocurrency (aka virtual currency) is a capital asset like property. And therefore, the buying and selling of it for profit results ter short-term capital build up if held for under one year, and long-term capital build up if held for overheen a year. Short-term capital build up rates are based on your regular income tax bracket, while the long-term capital gains rate is 15-20%, depending on income level. IRS Notice 2014-21.
So, for example, let’s say I bought Ten Bitcoin te June 2018 for $25,000 US dollars when the price of Bitcoin wasgoed approximately $Two,500. I determine that te December 2018 that I would like to sell my Bitcoin. The price is now approximately $16,500 vanaf Bitcoin, so my holdings are now worth $165,000. Spil a result, my $25,000 investment has generated a taxable profit of $140,000. Since I wielded the Bitcoin for less than one year, the income will be short-term capital build up income and I will pay at my regular federal rate.
If I instead held the cryptocurrency until July 2018, then I would have long-term capital build up and would be paying tax at a much lesser rate.
Any realized build up from the cryptocurrency profit is taxable. This is the case if you exchanged Bitcoin for other cryptocurrency, or for goods or services. Ter this example, you take the value of the Bitcoin ter US dollars at the time of the exchange for other property and treat whatever build up you have when that Bitcoin wasgoed exchanged (at the value of the other property) spil your taxable build up. Let’s say you bought Ten Bitcoin te 2015 for $250 vanaf Bitcoin for a total purchase price of $Two,500. You determine to exchange one Bitcoin, valued at $16,500 ter December 2018, for 17 Ethereum valued at approximately $500 vanaf Ethereum. Your build up on the Bitcoin being exchanged is the value of the Ethereum, $16,500, minus the cost of the Bitcoin, $250, for a long-term capital build up of $16,250.
Cryptocurrency mining is the process of using servers and other computers to verify the blockchain and transactions that are the backbone of the cryptocurrency. This IRS has stated that income from cryptocurrency mining, whether received te dollars or cryptocurrency, is taxable spil regular income. Consequently, if you have engaged ter the cryptocurrency mining business or are otherwise self-employed doing cryptocurrency mining then the income you received is taxable at your ordinary income rates and it will also be subject to self-employment tax.
Retirement Accounts and Cryptocurrency
Retirement accounts such spil IRAs and 401(k) can own Bitcoin and other cryptocurrency. This requires a self-directed IRA or 401(k) and some careful structuring. For a more detailed discussion on this topic, check out my prior article and movie here. When gains are made from the sale of cryptocurrency, whether for US dollars or other cryptocurrency, there is no tax owed on the build up. And, if you use a Roth IRA or Roth 401(k), there will be zero tax owed when you pull the funds out at retirement. For traditional IRAs and 401(k)s you pay tax when you withdraw the funds at retirement and thesis distributions, spil is the case for all traditional IRA or 401(k) distributions, are subject to tax at your ordinary income tax rate at the time of distribution.
If your self-directed IRA or 401(k) is invested into cryptocurrency mining, spil opposed to holding cryptocurrency for investment, then the income from such mining activities will likely cause unrelated business income tax.