Is Buying Crypto a Taxable Event?
If you own any crypto, there are two main types of taxes you may owe: capital gains and income tax.
Capital gains are profits that are realized when you sell, exchange or swap your digital assets. This includes both short-term and long-term gains, depending on the length of time you held the asset.
What is crypto?
Cryptocurrency, or crypto, is a form of digital money that doesn’t rely on traditional banks to verify transactions. Instead, it records all transactions in a decentralized ledger called the blockchain.
A network of computers called miners verify the validity of transactions on the blockchain and confirm each block that includes them. This process is based on cryptography, which uses encryption algorithms and other methods to secure data in a way that’s difficult to reverse or manipulate.
People can use cryptocurrencies to pay for travel, buy property in a virtual gaming world, and more. But a major risk is that you could lose all of your crypto investments if you misplace your virtual wallet or lose access to it.
How do I buy crypto?
Cryptocurrency is a digital asset that makes it possible to transfer value online without the need for a central authority like a bank or payment processor. It allows value to be transferred globally, near-instantly and 24/7 for low fees.
There are a variety of ways to buy crypto, like you can buy Ethereum with visa through an exchange or brokerage. The process can be a little intimidating, but it’s a fairly simple one that anyone can do.
First, choose a few cryptocurrencies that you’d like to own and research which exchanges support them. You’ll also want to consider security and safety, reputation, liquidity, fees and transaction speed.
Next, create an account with a crypto exchange. Most of them require some form of ID verification to help prevent fraud and money laundering. The process typically only takes a few minutes and can be done on any device, including smartphones. You’ll also have to deposit some cash or other fiat currency. Fees vary, but credit card deposits can come with a set fee as high as 5% of the total amount.
What is the tax rate for buying crypto?
When you buy crypto, it’s a taxable event similar to buying shares of stocks or other property. The amount you owe depends on the cost basis of the crypto, which is the total price you paid for it at the time you bought it.
If you own cryptocurrencies for more than one year, then you may qualify for lower long-term capital gains tax rates. These rates range between 0% to 20% depending on your income and filing status, which encourages investors to hold their assets for longer periods of time.
If you’re an investor, it’s important to understand how crypto taxes work. It’s common for people to get confused on whether or not they owe tax on their crypto transactions. Luckily, there are plenty of resources to help you understand how to properly report your crypto gains and losses.
What is the tax rate for selling crypto?
If you buy and sell Ethereum later, you’ll likely be taxed on the gain. The tax rate depends on how long you held the asset before selling it and your overall income.
The IRS’s guidance on cryptocurrencies is complex, so it’s important to speak with a certified tax professional about the specifics of your situation. They’ll help you understand how to report your gains accurately.
In the US, cryptocurrency gains are taxed as short-term capital gains or long-term capital gains depending on your circumstances. These rates range from 10% to 37% and are determined by your overall income.
Expatriates living abroad should also be aware of their own country’s tax laws regarding cryptocurrency. In addition, they should consult a CPA for Americans living abroad to ensure that their crypto-related holdings are properly reported on their U.S. tax return.
