Crypto currencies have been around for a while now, and their tax implications are well-known at this point. However, that doesn't mean people are familiar with them. As more people get into trading, investing, and lending cryptocurrencies, new tax questions and scenarios can surface. Let's run through a few questions on the tax implications of selling crypto currencies.
If you don't take money out of your account, are you still taxed? Yes, you are taxed when a buy/sell transaction completes. This means when a sell of the crypto accompanies a buy. That transaction creates a taxable event even if it remains in your account.
If you buy bitcoin and hold it but don't sell, and it goes up, are you taxed? No, because the transaction has not been completed. There is no sell to offset the buy. This is called an unrealized gain.
How much will you owe in taxes? You are only taxed on profits when a crypto currency is sold. For example, you buy $50k worth of a crypto currency and later sell it for $60k. Your profit is $10k, and that is what you'll be taxed on (not $60k).
Next, the amount of taxes will depend if the sale was a short or long-term capital gain. A short-term gain is for holdings of one year or less. Short-term capital gains are taxed at your ordinary income rate. A long-term capital gain (LTGC) is for holdings over one year and is taxed at a lower rate than your ordinary income. This creates an incentivization to go for long-term capital gains because they are always favorable to your ordinary income rate.
To see some of the advantages of long-term capital gains rates, we can look at a few loose estimates. If your regular income rate is:
30-35%, then your LTCG rate is 20%
28%, then your LTCG rate is 15%
10%, then your LTCG rate is 0%
For transactional crypto scenarios, tax implications are similar to that of stocks. Although, it's always best to work with your tax professional when figuring out the tax impact of selling crypto currencies.