How Do Cryptocurrency Taxes Work?

For better or worse, capital gains tax rules apply to cryptocurrencies like Bitcoin and Ethereum. The Internal Revenue Service (IRS) treats all cryptocurrency as capital assets, and you owe taxes when they’re sold at a profit. This is exactly what happens when you sell more traditional investments, like stocks or funds, at a gain.

How much you own in capital gains taxes depends on whether you’ve held your crypto for less than a year or more than one year. If you haven’t quite reached 12 months, your profits are taxed at short-term capital gains rates, a.k.a. your regular income tax rate. But if it’s been at least one year since you purchased your coins, you’ll qualify for a long-term capital gains rate that’s lower than most income taxes, depending on your taxable income.

And just like if you sell any other investment at a loss, if your crypto investment has fallen in value when you sell it, you are able to claim a capital loss, which you may be able to use to offset other income taxes.

But cryptocurrency taxes comes with a couple of additional wrinkles.

Crypto Taxes If You Use Cryptocurrency for Purchases

If you purchase goods or services with cryptocurrency, your purchase counts as a sale of that crypto. This means you’ll owe capital gains taxes if your coins have increased in value over what you originally paid for them. And what’s more, you’ll also owe any applicable sales tax.

Crypto Taxes When You Mine Crypto

If you earn cryptocurrency by mining it, or receive it as a promotion or as payment for goods or services, it counts as part of your regular taxable income. You owe tax on the entire fair market value of the crypto on the day you received it, at your regular income tax rate.

And if you hold the same cryptocurrency you mined or earned from these activities, its value increases, and you either spend it or sell later at a profit, you would also owe capital gains taxes on the profits, based on how long you’ve held it.