In this episode of Coffee with Carl, attorney Carl Zoellner covers the basics of taxation for cryptocurrency investments.

Updated September 21, 2021

Cryptocurrency investing is popular again, but how are cryptocurrency investments taxed? There are two main flavors of investing in cryptocurrency, each with its own tax structure: mining and purchasing coins.

Taxes on Mining Cryptocurrency

“Mining” cryptocurrency means gathering cryptocurrency by maintaining the blockchain or using mining machines or cloud mining. Regardless of the type, the IRS considers income from cryptocurrency mining active. This means you pay taxes on it at your individual tax rate PLUS the 15.3% self-employment tax.

Taxes on Purchasing Cryptocurrency

On the other hand, purchasing cryptocurrency is the more common form of cryptocurrency investing. Similar to stock trading, the IRS treats cryptocurrency as property. With both stocks and cryptocurrency, there are two ways you can be taxed depending on the length of time you hold the crypto coins: at the short- or long-term capital gains rates.

• • Short-term capital gains rate: The sale of coins held for less than one year gets the short-term capital gains rate, which is your individual income tax bracket (no self-employment tax on top).
  • Long-term capital gains rate: This is the more favorable tax treatment between the two. The sale of coins held for more than one year gets the long-term capital gains rate, which is 0%, 15%, or 20% depending on your income bracket (no self-employment tax on top).

Watch as Carl breaks down the basics of cryptocurrency taxes in part one. Stay tuned for part two, where Carl explains the IRS’ guidance when it comes to cryptocurrency.

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If you have any questions, comments, or feedback about this episode, let us know at cwc@andersonadvisors.com.

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