Tax Implications of Selling Virtual Currency

Cryptocurrency is not backed by any government. Therefore, it is subject to less regulation than traditional currencies. As a consequence of this, many cryptocurrency investors have a belief that they have found a loophole to avoid paying taxes. However, this is not correct. Virtual currency exchanges, whether a gain or a loss, must be reported to the IRS and is taxed in a similar manner as traditional stocks.

Cryptocurrency is considered property for federal income tax purposes, meaning the IRS treats it as a capital asset. Because of this, the taxes generated as a result of a virtual currency sale are the same as a realized gain or loss on the sale or exchange of a capital asset. When a capital asset is purchased, the cost basis in the capital asset is equal to the cost to obtain the capital asset. When the capital asset is sold, the net sales proceeds are compared to the original basis to determine whether the result is a capital loss or a capital gain.

When buying and selling cryptocurrency, comparing net proceeds to the cost basis isn’t the only step. The length of time the asset is held is used to determine the type of capital gain or loss recognized.

Assets bought and subsequently sold within one year should recognize a short-term capital gain or loss. Short-term gains and losses are subject to the same tax rates as ordinary income.

Assets bought and subsequently sold after one year should recognize a long-term capital gain or loss. Typically, long-term capital gain rates are more favorable than short-term capital gain rates. There are currently three tax rates for long-term capital gains – 0%, 15%, and 20%. The rate entirely depends on your income.

2021 Rates:

  • Single Status:
    • 0%: $0 – $40,400
    • 15%: $40,401 – $445,850
    • 20%: $445,851+
  • Married Filing Jointly Status:
    • 0%: $0 – $80,800
    • 15%: $80,801 – $501,600
    • 20%: $501,601+

Tax Implications of Selling Physical Gold or Silver

Physical holdings in precious metals are capital assets. The IRS specifically categorizes gold and other precious metals as collectibles. Holdings in these metals, regardless of their form are subject to capital gains tax. However, the capital gains tax is only owed after the sale of such holdings.

While many financial securities are subject to short-term or long-term capital gains tax rates, the sale of physical precious metals is taxed a little differently. Short-term gains on precious metals are taxed using ordinary income rates that apply to other income, such as wages. Physical holdings sold after one year are subject to a capital gains tax equal to your marginal tax rate, up to a maximum of 28%. Even though the 28 percent collectibles capital gains tax rate is higher than the long-term capital gains tax rates for traditional capital assets, it is still a more favorable rate than short-term gains. This is especially true for higher income earning individuals that fall into the in the 32%, 35%, and 37% tax brackets as these individuals would still only have to pay 28% on their physical precious metals sales.

Tax liabilities on the sale of precious metals are not due at the time of sale. Instead, sales of physical precious metals need to be reported on Schedule D of Form 1040 on your tax return. However, sales of certain types of metal require Form 1099-B to be submitted to the IRS at the time of the sale.

The amount of tax owed on the sale of precious metals depends on the cost basis of the metals themselves. If you purchase the metals yourself, then the cost basis is equal to the amount paid for the metal. It’s also important to note that the IRS allows certain additions to the basis, such as the cost of appraisals.

If the precious metals are received via inheritance, then the cost basis is equal to the market value on the date of death of the person from whom you inherited the metals.

If the precious metals are received as a gift, the cost basis is the lesser of:

  1. The market value of the precious metals on the date that the gifter purchased them, or;
  2. The market value on the day that the precious metals were gifted.