Some people think the whole point of cryptocurrency is so you can avoid paying taxes. This decentralized digital currency doesn’t have banks or government agencies acting as third parties in your transactions; that means you can buy and sell stuff – including your services – without anyone knowing, right?
Not really. When you use Bitcoin, for example, that blockchain is a public ledger that records all your transactions for anyone to audit; they won’t have your name or phone number, but they will have a blockchain address that could be tied to you with enough digging. Think of it as pseudonymous rather than anonymous.
Ultimately, you’re being trusted to pay taxes on these transactions the same way you should with any other property you bought or sold last year. Here’s what you need to know as we approach April 15 – the dreaded Tax Day in the United States. Other countries will have different tax codes, but the gist should be roughly the same.
Why Do I Have to Pay Taxes?
So we can have nice things. Assuming they’re acting in good faith, governments levy taxes so they’ll have money to spend on public expenditures like highways or health care – or just to keep the government up and running smoothly without foreign interference.
The hope is that by pooling our resources together, we can have more and nicer things than if we all had to individually pay someone in the private sector. This was a lot harder to do before money was invented; for example, in ancient Babylon, the head of the household was forced to work for the government several months of the year, maybe even in the military. Those who could afford slaves sent them instead.
Why Do I Have to Pay Taxes on Crypto?
Because it’s a digital asset. The Internal Revenue Service (IRS), the federal body that administers the U.S. tax laws and collects your money, treats cryptocurrency the same as property –which means you have to pay taxes just like you would with stocks or mutual funds.
Having said that, just because you own crypto doesn’t mean you have to pay. The question is whether you earned anything with that crypto. If you bought Bitcoin in September 2024 for US$50,000 and sold it in December for $100K, that’s 50 large in capital gains.
In this case, your $50K is considered a “short-term” capital gain because you held that crypto for less than one year. Long-term capital gains are taxed differently; you might even pay 0% if your income is low enough, but 20% is the top rate, compared to 37% for short-term gains.
Ah yes: income. That’s the other way you can make money off crypto, maybe by staking or yield farming, or simply by mining Bitcoin. If you profited from these efforts in 2024, that income is treated just like the money you might earn from your day job – or the income you might collect on stock dividends or bond interest.
How Can I Avoid Paying Crypto Taxes?
As long as you’re following the rules, you can minimize your tax outlay by holding onto your crypto for more than 12 months before flipping it; moving your funds into an Individual Retirement Account (IRA) can help you build your investment portfolio while you’re crypto is on ice.
You can also avoid paying taxes by “gifting” your crypto rather than sending it as part of a standard transaction. The IRS allows gifts of up to $18,000 without having to report them –or at least they are for gifts sent in 2024. The entire tax code for next year could be re-written now that Donald Trump is in the White House.
There are other rules to follow in both these instances, as there are for making crypto donations, so if you’re trying to pay as little as possible in taxes, take the time to study the finer details, or hire a tax professional to do the heavy lifting if you think it’ll save you money and/or grief. In the meantime, thank you for contributing to our greater good, and keep coming back to Bookmakers Review for more crypto tips and analysis.
