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+