Calculate Capital Gains Tax on Cryptocurrency

Capital Gains Tax

What is Cryptocurrency?

Cryptocurrency is a digital currency or payment system that may be used to buy and sell products and services on numerous online platforms. It enables everyone in the world to send and receive money from the comfort of their own home. Cryptocurrency exists entirely as a digital currency that can be used everywhere and eliminates the need to always carry real money. It can only be used once since it is protected by databases and cannot be reused. Every cryptocurrency transaction is recorded in a public ledger. It is similar to a digital wallet. What is the point of even leaving the house if everything is digital?

Is Cryptocurrency Secure?

Cryptocurrency is primarily built and secured using a technology known as the blockchain. A blockchain is a type of highly secure database for recording and storing transactions. To someone who is just getting started with bitcoin, it can seem incredibly confusing. However, if you understand its purpose and functionality, it will be as easy as pie. To really understand what blockchain is, it is necessary to first understand what a database is. A database is a platform that collects information and stores it in an electronic file cabinet. It is typically organized in the form of a table, allowing the user to quickly find and use the information without having to spend hours searching for it. A database is designed to hold massive amounts of data for huge corporations or even government agencies because all data can be simply categorized by numbers and accessed by many individuals. At the very least, you will not have to spend hours digging through a real cabinet for a misplaced file!

Now that we have covered databases, let’s look at how they differ from blockchains. The structure of the two differs significantly; a blockchain stores its data in blocks/chunks chained together, whereas a database stores all its data in tables. A blockchain collects information in groups/blocks, and each block has a defined storage capacity. When one block is full, it is chained onto the previously full block, forming a data chain known as a blockchain. You are probably wondering how all that info is protected from hackers. Let me explain whenever a blockchain of data is created, it is structured in such a way that it cannot be easily accessible. Blockchains rely on a network known as cryptography. If tons of blocks connected with an overabundance of data is not enough to frustrate a hacker, cryptography makes it even more difficult. It is safeguarded by private keys that network participants can only obtain; these keys serve as a digital signature for all transactions. Overall, if you are ever concerned about your digital money being stolen, return to this post and you will be pleased with how secure your information is.

How Do I Gain on Bitcoin?

Capital Gains Tax

We can never escape paying taxes, no matter where in the world we move to. When living in any country, it is both a necessity and a requirement. So, how can you pay taxes if you continually or regularly use digital money to gain capital? Well, let me explain.

The IRS has addressed all of the citizens’ questions about filing their taxes when most of their income comes from trading. The IRS defined bitcoin as an asset equivalent to property in Notice 2014-21, and it is taxed accordingly. The IRS has made it mandatory to report any bitcoin transaction, no matter how little the amount. The tax rate on capital gains currently ranges from 0% to 37%, depending on how the gain is calculated.

The IRS has addressed all of the citizens’ questions about filing their taxes when most of their income comes from trading. The IRS defined bitcoin as an asset equivalent to property in Notice 2014-21, and it is taxed accordingly. The IRS has made it mandatory to report any bitcoin transaction, no matter how little the amount. The tax rate on capital gains currently ranges from 0% to 37%, depending on how the gain is calculated.

  1. The accounting method you employ to calculate gains.
  2. How long the coins were kept before being sold.
  3. Your total income for the year, including non-crypto transactions, as well as your tax filing status.

Let’s start with the accounting method. The coin sold is significant for the accounting method. Profits = sales price – cost basis is the formula for calculating the capital gain on any cryptocurrency. The goal is to have a larger cost basis to pay less tax on capital gains. To precisely identify the coins sold, detailed records are required. If you sell the coins with the highest cost basis, also known as Highest-in-First-Out (HIFO), you will have to pay the least amount of capital gain taxes. However, if detailed records cannot be discovered, you will be forced to use the First-in-First-Out (FIFO) approach, in which you sell the earliest purchased coin regardless of price.

After calculating your gains using an accounting method, you will categorize them as short-term or long-term based on when you sold them. Short-term gains occur when a coin is sold after being held for less than a year, and they are included in your income and taxed as regular income. Long-term gains arise when a coin is held for more than 12 months before being sold. These gains are taxed at 0%, 15%, or 20% depending on the tax bracket.

How Can We Help?

All of this demands the services of a tax accountant who can provide you with the most accurate estimate and assist you in making the most profit. SDG Accountants is one of the best accounting firm in Miami. We offer a variety of tax services, including US expat tax and US corporate tax. We can assist you in filing your taxes and estimating your capital gain.

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