When it comes to taxes on cryptocurrency, there is a lot of confusion. The IRS has said that cryptocurrency is property, but has not yet provided guidance on how to treat it for tax purposes.
This leaves many people wondering if they need to pay taxes on their cryptocurrency when they convert it to cash.
The answer is yes, you may have to pay taxes on your cryptocurrency when you convert it to cash. The amount of tax you owe will depend on how much profit you made on the conversion. If you convert your cryptocurrency back to cash within a year of purchasing it, you will likely owe short-term capital gains taxes.
These taxes are calculated based on your marginal tax rate, which is the tax rate you would pay on your last dollar of income. For most people, this is their ordinary income tax rate.
If you hold your cryptocurrency for more than a year before converting it to cash, you will likely owe long-term capital gains taxes. These taxes are lower than short-term capital gains taxes, and are calculated based on your tax bracket.
For most people, this is 15%.
If you have any losses on your cryptocurrency conversions, you can use them to offset your gains and lower your tax bill. You can only use losses from conversions made in the same year as the gains.
For example, if you made $1,000 in gains from converting cryptocurrency in 2020, but had $500 in losses from converting cryptocurrency in 2019, you could only offset $500 of your 2020 gains. This would result in a net gain of $500 for 2020, and you would owe taxes on that amount at your marginal tax rate.
In conclusion, whether or not you owe taxes on your cryptocurrency conversions depends on how much profit you made and how long you held the cryptocurrency before converting it. If you have any losses, you can use them to offset your gains and lower your tax bill.