Why is Crypto So Popular and What Does it Mean for Your Taxes?
Cryptocurrency is a hot investment topic and has been for several years. If you’re investing in crypto, it’s essential that you also think about the possible tax consequences.
If you engaged in taxable crypto transactions and failed to report them to the IRS or didn’t pay taxes on them, an experienced tax attorney can help you figure out what to do.
If you’re just getting in on the crypto scene, it might seem like you had never heard of cryptocurrency and then suddenly, you started hearing about Bitcoin and Ethereum all the time.
So, what is making cryptocurrency so hot?
- Crypto is relatively easy to purchase
While previously there were few entities offering crypto, it’s now feasible to buy it from all sorts of reliable brokers. For example, in 2022, Fidelity began offering Bitcoin as an option through its 401(k) plans.
Not surprisingly, the ease of purchase has influenced the steep rise in the popularity of crypto.
That ease is also causing inexperienced investors to put their money in and out of crypto without realizing the tax implications.
- Crypto transactions are known for low fees and high security.
Across the world, cryptocurrency is becoming a more popular form of payment because the fees for using it tend to be relatively low.
Often, other online transactions, especially internationally, incur higher fees.
In a world where cybersecurity and identity theft are major concerns, using cryptocurrency for payment is known to be safer than other options.
- Crypto eliminates the use of banks.
One reason that paying in crypto comes with lower fees is that there is no bank involved.
In traditional bank transactions, the bank charges a fee for its role in the process.
When you pay in crypto, you don’t even need a bank account.
That also means your cryptocurrency is in your control, not in the control of the bank.
- As a crypto investor, you have the potential to make a solid profit.
While crypto prices have been up and down lately, it’s the possibility of making a lot of money on the right investment at the right time that has fueled its rise in popularity.
In addition to Bitcoin and Ethereum, there are now more than 20,000 cryptocurrencies available, which means lots of different possibilities for investment.
- Crypto isn’t associated with a particular country or government, making it easier to protect.
When a crisis arises in a particular country, it usually affects the value of their currency.
Crypto is a digital currency that is not connected to a country or government, so it is not likely to be affected in such a case.
In an economic downturn, a government can print more currency, which can reduce its value.
However, most cryptocurrencies have a defined number of units available and there is no government that could create more.
- The number of sellers that accept crypto for payment is rising.
Over the past couple of years, more merchants around the world have started to accept crypto for payment, further inciting people’s interest in it.
You might notice that more websites are accepting crypto, and that’s expected to be the case for even more sites in the future.
Also, there are now certain governments that recognize crypto as a legitimate form of payment.
El Salvador began accepting Bitcoin in 2021, the Central African Republic began accepting it in 2022 and it won’t be surprising if more countries follow suit.
- Interest is growing in the Metaverse, with digital currency playing a significant role.
If crypto seems popular already, the growth of the Metaverse is likely to serve as a catalyst for even more growth.
The Metaverse is a term used to describe a virtual universe in which participants have digital avatars and interact with each other.
Transactions in the Metaverse are similar to real-life transactions — like mortgages, investments and other typical purchases.
Assuming the Metaverse takes off, crypto will inherently grow as the currency of that virtual space.
When You Have to Pay Taxes on Crypto
Given that crypto is digital and the ease and popularity of crypto investing for all of the reasons above, it might be easy to forget that you do have to pay taxes on certain crypto transactions.
In fact, the IRS has been cracking down on crypto investors in recent years to ensure that they both report their investments and pay taxes on them when required.
The good news is that you do not have to pay taxes if you bought some crypto and held onto it in your Coinbase or other account.
But the IRS considers your crypto a form of property, and you must pay taxes if you engage in trading crypto.
Simply put, if you sell, trade or dispose of any crypto and it has increased in value since you bought it, then you owe taxes to the federal government.
Learn more about the tax implications of crypto investing and how to report your crypto transactions to the IRS in our detailed guide here.
How Much Taxes Will I Have to Pay on My Crypto?
Similar to other assets or investments, your crypto will be taxed based on gains or losses over a defined period of time.
The amount of your gains on an investment is how much it went up during the time you owned it.
The amount of your losses is how much your crypto went down in value during the time you owned it.
These are known as capital gains and capital losses.
What you need to pay in taxes depends on how much you gained and how long you held the crypto before selling it.
If your capital losses are greater than your capital gains, you can deduct up to $3,000 from your taxable income (for an individual tax filer).
Here are some key definitions to keep in mind:
Short-term capital gains: When you hold an asset for less than one year, you will be taxed at the short-term rate. Short-term capital gains are taxed at the same rate as ordinary income, such as wages from a job.
Long-term capital gains: Long-term rates apply when you’ve held an asset for more than one year. The IRS has three brackets for long-term rates, from 0% to 20%.
Review these short- and long-term capital gains examples and charts to understand how much you are likely to owe depending on your crypto trading activity.
If the IRS is questioning your reporting of crypto investment transactions — or lack thereof — talk to a tax attorney and get help now.