Cryptocurrency is treated by the IRS like property, meaning that it must be taxed in the same manner as stocks. Reporting obligations arise upon buying, exchanging, gifting and receiving income from staking crypto.
When selling or buying crypto, when calculating gains or losses you must subtract your original purchase price (cost basis) from the sale price to determine your gain or loss and tax these as either short-term capital gains or long-term capital gains depending on their nature.
Taxes on Transactions
Financial Transaction Taxes, also known as Tobin taxes, are small levies placed on transactions of stocks, bonds and derivatives traded between trading parties. Sometimes proposed as an alternative to existing income, corporate and value-added taxes; FTT can even help lower government borrowing costs.
James Tobin first suggested the Tobin tax during the 1970s as a means to curb currency speculation and control wild exchange rate fluctuations that were then crippling global economies. Since then, policymakers have revived it as an potential cure for excessive trading that contributed to 2008 financial crisis.
Honohan and Yoder (2010) conducted an analysis on trading activity and market volatility, and determined that a Tobin tax could raise significant revenues without altering traders’ incentives or frequency of trading; however, such taxes wouldn’t provide an ideal solution to future crises. They reviewed literature regarding trading costs and “elasticities,” then calculated potential revenues under various rates and exemptions.
Taxes on Gains
Capital gains tax is a specific form of tax levied when an asset such as real estate, stocks, mutual funds or cryptocurrency appreciates in value and is sold. The tax applies to any profit realized, with short-term and long-term capital gains taxes levied depending on how long an investment was held before being sold.
Proponents contend that low capital gains rates encourage investors to save and invest, which in turn spurs economic growth and creates jobs. Critics counter with arguments about double taxation; money used for stock purchases has already been taxed as regular income and adding another capital gains tax is only unfair taxation.
Investors should be mindful that short-term gains could be subject to higher tax rates than their long-term ones, with short gains potentially taxed at a higher rate in order to discourage day trading and excessive asset flipping that could destabilize markets. They should also avoid taking advantage of the wash sale rule which applies when an investor sells an investment at a loss and immediately purchases a substantially similar one at a higher price in order to realize a gain.
Taxes on Investments
Ryan Dennehy, Principal at California Financial Advisors explains the importance of keeping tax rules in mind when investing, since tax laws can significantly erode overall returns from investments. Investment income such as dividends and cash distributions generally must be taxed in the year of receipt while long-term gains on securities such as stocks, bonds, cryptocurrency, real estate or mutual funds are subject to capital gains taxes when sold off.
Uncle Sam assesses long-term investments based on how long they were held for, with rates ranging from 0%, 15% or 20% depending on an investor’s taxable income and filing status. Investors may offset capital gains with realized capital losses of up to $3,000 annually through offset. Any unutilized losses can also be carried forward to next year for consideration.
