If Bitcoin rises by the end of 2022, will my winnings be taxed?

In November 2021, Bitcoin (BTC 2.86%) climbed to a record high of more than $ 68,000.

But 2022 has been a bumpy ride for the leading cryptocurrency. The price of a token fell below $ 18,000 at the end of June, and the extreme volatility has made investors struggle to predict which direction Bitcoin will go next.

There is still a chance for Bitcoin to get back on track in 2022. But if the price rises and you keep it, you could be on the hook for taxes. Below we will dive into how Bitcoin gains are taxed, and different scenarios you should be aware of before tax.

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How taxes on cryptocurrency gains work

Bitcoin is the best cryptocurrency by market value – about $ 378 billion at the time of writing, with tokens changing hands at a price of around $ 20,000.

If you were one of those who bought the dip and the price of Bitcoin shoots up before the end of the year, you may be tempted to lock in your winnings by selling. But before you press the sales button, you should consult with your accountant or tax advisor. They will give you a better idea of ​​how to report these cryptocurrencies to the IRS, if necessary.

Cryptocurrency is classified as real estate in the eyes of the tax authorities, so you have to pay tax on transactions with the one you make with profit, just as you would with any other real estate transaction. Selling Bitcoin for more than you bought it for in a taxable investment account can trigger capital gains tax. So if you are making money on your Bitcoin holdings, you should be aware of the cryptocurrency rate that applies to you before you throw yourself out with this profit.

Breaking down short-term vs. long-term capital gains

Let’s say you bought Bitcoin worth $ 60,000 in July 2021 (when it traded close to $ 30,000 per token). Let’s now imagine that by November 2022, the price has declined and the value of your Bitcoin holdings has risen to $ 100,000. If you decide to sell at that time, you will have a capital gain of $ 40,000. Your bitcoin for more than a year before you sold, you would be taxed at your long-term capital gains rate. Depending on your income, this rate will be either 0%, 15% or 20% – favorable levels.

However, if you sell assets – including cryptocurrencies – before you have held them for more than a full year, the short-term capital gains rates apply, so get ready for a higher tax bill. These marginal tax rates range from 10% to 37% – the same rates that apply to the income you earn from working.

What if I do not sell Bitcoin?

If you do not sell or trade your Bitcoin at a profit, you probably do not need to worry about capital gains tax. You do not officially post a taxable gain or loss if you hold on to your Bitcoin.

If you only buy Bitcoin this year, you will not trigger a taxable event either. Taxes only come up when you sell, trade or toss Bitcoin for a profit.

Cryptocurrencies apply to taxable investment accounts

Gains tax applies when you make money in a taxable investment account. So if you keep your Bitcoin in a taxable investment account on a platform like Coin base (NASDAQ: COIN) or Robin Hood (NASDAQ: HOOD), you must pay taxes on all profits you earn.

Look for a Form 1099 from your stock exchange or broker to help you file cryptocurrencies. The information it provides will help you fill out IRS Cryptocurrency Form 8949. Again, if you are stuck and do not know how to report cryptocurrencies on your tax return, you should contact your accountant or tax advisor.

But not all profits are taxed in the same way. If you buy Bitcoin in your self-managed IRA (individual pension account), sell it at a profit and keep the income in that account, capital gains tax will not apply. Capital gains tax does not apply to pension accounts.

Gains can trigger taxes

Every time you sell or trade cryptocurrency for a profit on a taxable investment account, you trigger a taxable event. If Bitcoin increases towards the end of 2022, you should think twice before selling. Although the profit may look sweet on your account, you must report the gain to the IRS.

Taxes on crypto are partly based on how long you have held on to your investment before disposing of it. If you want to maximize your profits, it is best to hold on to your Bitcoin for over a year before selling. The long-term capital gains rates will make all the profits in your portfolio more attractive.