Cryptocurrency Tax Implications
What to Know When Selling Cryptocurrency
Key Points:
- Selling cryptocurrency is subject to federal capital gains tax.
- The IRS treats cryptocurrency as capital assets, resulting in capital gains tax when sold at a profit.
- Short-term capital gains are taxed at ordinary income rates, while long-term capital gains have lower tax rates.
When selling cryptocurrency, it is essential to be aware of the tax implications. The Internal Revenue Service (IRS) classifies cryptocurrency as capital assets, meaning that any profits made from its sale are subject to capital gains tax.
Capital gains tax is calculated based on the length of time the cryptocurrency was held before it was sold. Short-term capital gains, which occur when cryptocurrency is sold within one year of purchase, are taxed at ordinary income rates. Long-term capital gains, which occur when cryptocurrency is held for more than one year before it is sold, are taxed at lower rates.
To calculate capital gains, subtract the cost basis (the amount you paid for the cryptocurrency) from the sale price. If the result is positive, you have a capital gain. If the result is negative, you have a capital loss.
Capital gains taxes can be a significant expense, so it is important to factor them into your investment decisions. If you are planning to sell cryptocurrency, it is a good idea to consult with a tax professional to ensure that you understand the tax implications.
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