As cryptocurrency becomes increasingly mainstream, the IRS maintains clear guidelines for taxing digital assets in 2024. Cryptocurrencies, like Bitcoin or Ethereum, are treated as property, meaning capital gains taxes apply when sold, exchanged, or used. The tax rate depends on how long the asset has been held and your income level.
Short-term capital gains tax rates range from 10% to 37% for assets held less than a year, while long-term capital gains rates range from 0% to 20%, depending on your income bracket. For instance, if you’ve held cryptocurrency for over a year, the profits are taxed at the long-term capital gains rate, which is generally more favorable. In contrast, selling assets within a year results in a higher tax burden due to short-term capital gains rates.
It’s also important to note that not all crypto transactions trigger tax liability. Selling cryptocurrency at a loss or moving it between wallets typically won’t result in a tax bill. However, activities like staking or trading one cryptocurrency for another or any other asset will generate a taxable event. Additionally, receiving cryptocurrency as payment or mining rewards is subject to ordinary income tax based on the fair market value at the time of receipt.
One significant advantage of cryptocurrency investing is the ability to offset capital gains with losses. If you incur crypto losses, they can offset profits from selling any capital asset, not just cryptocurrency. Excess losses up to $3,000 (or $1,500 for single or married couples filing separately) can offset ordinary income. If your losses exceed these limits, they can be carried forward into future years, which can help reduce your taxable income in subsequent tax filings.
To properly report these transactions, taxpayers must record the history of all cryptocurrency-related activities on IRS Form 8949. This detailed record is then summarized along with other capital gains from investments on the individual’s Schedule D, Form 1040, ensuring accurate tax reporting for all asset gains and losses.
Keeping meticulous records of all cryptocurrency transactions is crucial to ensuring compliance and accuracy in tax reporting. Contact your tax manager/partner at 610-687-1600 or [email protected] for additional information.
Author Olympia Z. Anagnostou, CPA, is dedicated to helping clients achieve significant tax savings. As a tax manager at Stephano Slack, Olympia works closely with small business owners and individuals to develop customized tax planning strategies that help them keep more of their hard-earned money. Contact Olympia at 856-489-0222 ext. 3414 or [email protected] to discover how effective tax planning can benefit you.
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