If you are a US resident who invested in bitcoin or other cryptocurrencies in 2021, you may have recently received a tax document from the trading platform or cryptocurrency exchange you use and may be required to pay taxes.
While there is currently very little guidance on the taxation of cryptocurrency, one thing is clearly defined. The Internal Revenue Service (IRS) views cryptocurrency as property for tax purposes. That means you likely received a tax document because you either experienced a capital gain on that virtual investment in 2021 or received cryptocurrency as compensation, which the IRS considers ordinary income.
Reading: Bitcoin tax calculator
For all practical purposes, the irs has issued guidance that defines cryptocurrencies like bitcoin and ethereum as virtual currencies. this guide is subject to interpretation, but for most people, the main things to consider from a tax perspective are:
- How long did you hold your bitcoin or other cryptocurrencies from purchase to sale? If held for less than a year, any gains may be subject to short-term capital gains tax. if held for more than a year, any gains may be subject to long-term capital gains tax.
- what is your filing status and income taxable? that will determine your tax bracket and tax rate on any bitcoin earnings.
- what is your state tax rate? that will determine how much you may owe in state taxes.
bitcoin tax calculator instructions
part 1: enter your personal data
Step 1: Select the tax year in which you would like to calculate your estimated taxes. Step 2: Select your filing status. Step 3 – Enter your taxable income excluding any earnings from bitcoin sales. For most people, this is the same as adjusted gross income (AGI). Step 4: Enter your state tax rate.
part 2: for each sale of bitcoin within a fiscal year
Step 1: Enter the purchase date and purchase price. the purchase date can be any time up to December 31 of the selected fiscal year. Step 2: Enter the sale date and the sale price. make sure the sale date is within the selected fiscal year. Step 3: Repeat for all bitcoin or cryptocurrency sales within the selected fiscal year.
bitcoin tax calculator
bitcoin tax situation example
This example calculates estimated taxes for tax year 2021 for a person who made two sales. all values are in usd.
person to tax and financial data
2021 taxable income: 85,000 2021 filing status: 2021 flat state tax rate: 5%
on Feb. On January 1, 2021, a person sold bitcoins for a total of $10,000. that bitcoin was previously purchased on June 1, 2020 for $5,000. Since it was held for less than a year, the $5,000 gain is subject to short-term capital gains tax rates. Depending on the marital status and income of person a, taxes are calculated as follows:
- The first $1,375 in earnings is taxed at the 22 percent federal tax rate.
- The remaining $3,625 is taxed at the 24 percent federal tax rate.
- The entire $5,000 is taxed at the state tax rate of 5 percent.
$1,375 x 22 percent ($302.50) + $3,625 x 24 percent ($870) = $1,172.50 federal short-term capital gains tax due
$5,000 x 5 percent = $250 state tax
$1,172.50 + $250 = $1,423 total tax liability for transaction #1 (rounded up)
On March 1, 2021, a person sells bitcoins for a total of $10,000. That bitcoin was purchased on Feb. 1, 2017 for $3,000. Since it was held for more than a year, the $7,000 gain is subject to long-term capital gains tax. in addition, person A’s taxable income is now calculated at $90,000 to include income from the previous sale. taxes are calculated as follows:
- all $7,000 is taxed at the 15 percent long-term capital gains tax rate.
- all $7,000 is taxed at the 5 percent state tax bracket.
$7,000 x 15 percent = $1,050 federal long-term capital gains tax due
$7,000 x 5 percent = $350 state tax due
$1,050 + $350 = $1,400 total tax liability for transaction #2
total taxes due
Since both short-term and long-term capital gains are positive, total taxes due are calculated as follows:
$1,173 short-term federal capital gains + $1,050 long-term federal capital gains + $600 state taxes due = $2,823 total taxes due
This article is for informational purposes only and not legal or financial advice.