Buying and selling Bitcoin for a profit makes you subject to capital gains taxes. Capital-gains taxes occur whether you exchange Bitcoin for dollars or other cryptocurrencies for a profit. Also, it is a similar case when you buy Bitcoin, it increases in value, and then you exchange it for services and products.
The IRS Revenue Ruling occurred twice in 2014-21 and 2019-24, offering guidance on crypto tax issues. The serious resolve by the IRS in 2014 stated that cryptocurrency is the property and not currency for federal tax uses. This acute resolve meant that crypto-trading profits would be the same as stock-trading profits since both stock and crypto are taken as assets for tax purposes.
Handling crypto profits similar to stock seems easy enough; however, the rules are unclear for Bitcoin and other cryptos. This is because you can buy crypto with dollars, it fluctuates in value, and you exchange it to purchase a product or even withdraw for cash at a Bitcoin ATM.
Such exchanges are unusual in stock trading, making rules for crypto taxation confusing. Hence the guidance below; read on.
Exchange between Crypto
When you exchange particular crypto for another, it causes taxable gain. For instance, if you purchased $50,000 worth of Bitcoin now and then exchange it later for $70,000 of Ethereum, and then you will receive a taxable gain of $20,000. This occurs whether you hold the Bitcoin for a minute or years and exchanged it for another cryptocurrency.
Using Crypto for Products and Services
When you trade cryptocurrency for products or services, you gain tax on the surge in value the cryptocurrency has from the purchase until exchange. For instance, if you buy a Tesla with Bitcoin of $100,000, you will have to track the time you bought that $100,000 and then pay tax on the value increase.
If you bought the Bitcoin at $40,000, you would get $60,000 when you trade that Bitcoin for the Tesla. However, if you hold it for over a year, it will be a lasting capital gain and will be at desired rates. If Bitcoin were in possession for less than a year, the $60,000 profit would be taxed at temporary capital-gains rates.
When you trade with any cryptocurrency for a loss, you have enabled a tax loss. Losses occur when selling crypto, exchanging crypto for another cryptocurrency, or even products and services, all at a loss.
Losses from a crypto exchange can offset other crypto gains in a matching proportion of short-term to short-term and long-term to long-term. It is also possible to use crypto losses to offset gains from stock or joint funds.
When crypto losses surpass gains for crypto stock, ETF, and mutual fund, you can use a maximum of $3,000 of the loss to offset various incomes like salaries or self-employment income. For the losses that cannot offset income fully in the year gained, you can carry forward to future years for crypto or stock-trading gains.
When choosing a provider for either crypto IRA or crypto Roth IRA, experts advise that be cautious for significant trading fees. Ensure they are registered and that you are comfortable with the team and the selection of services.