Can You Owe Taxes On Crypto? Your Stimulus Check?

An editorial stock photo of a studio shot of a Bitcoin with some IRS 1040 tax forms.
LPETTET / Getty Images

New asset types and new government aid have people wondering whether or not they will take a hit come tax time. Digital currencies like Bitcoin and Ethereum have only recently begun to be treated like regular assets, and for the first time in history the government has given out multiple direct payments for those suffering during a global pandemic, so things can get a little confusing.

See: Investors Could Benefit from Tax Loophole for Crypto Losses
Find: How to Avoid Paying Back the Child Tax Credit

Taxes on Crypto

Cryptocurrency is taxed as at the regular capital gains tax rate, which could be anywhere from  zero-to 37% depending on a number of factors. These taxes are only owed when the gain, or profit, is realized — you only owe taxes on your crypto if you sold any of it and made a profit in 2020.

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The accounting method you use largely affects how your crypto assets are taxed as well. Coins are typically purchased at different times and at different prices, given the high volatility of the asset. The cost of your initial investment plays a huge role on the amount of tax you will end up owing. The lower the profit, the lower the capital gains subject to tax and vice versa.

Forbes reports that you can specifically identify the coins you are selling as long as you have detailed records. They add that selling the coins with the highest cost basis (highest in, first out) results in the least amount of gains subject to tax. Should you not have detailed records, the accounting method will automatically be defaulted to first in, first out where you are deemed to be selling the earliest purchased unit regardless of price.

For example, let’s say you bought BTC at $30,000 in January and BTC at $5,000 in March, then sold in April for $50,000.

If you have detailed records, under highest in, first out, you could use the January purchase price to determine cost basis, that is profit equals sale price minus cost basis. In this case a lower profit would be recorded as 20,000 = 50,000 – 30,000. Again, in order to benefit from this you would have needed to keep detailed records.

The other way around, first in, first out would see a higher profit, and thus more money subject to tax. $45,000 = 50,000 – 5,000.

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See: IRS Announces it Will Automatically Correct Tax Returns for Unemployment Tax Breaks
Find: You May Want to Opt Out of Monthly Child Tax Credit Payments – Here’s Why

Since crypto assets are taxed at capital gains tax rates, the holding period matters. If you hold the asset for less than 12 months, it is taxed as regular income, up to 37%. If the asset is held for 12 months or more, long-term gains tax applies which are subject to either zero, 15 or 20 percent tax brackets.

Taxes on Stimulus Money

In short, there is no tax due on stimulus payments. The IRS already has records of your receipt of the money, and as such no further action is required on the part of the taxpayer. This type of government aid is unique and should not be confused with unemployment insurance which is sometimes subject to tax depending on what state you live in.

According to the IRS, “the payment is not income and taxpayers will not owe tax on it. The payment will not reduce a taxpayer’s refund or increase the amount they owe when they file their 2020 or 2021 tax return next year. A payment also will not affect income for purposes of determining eligibility for federal government assistance or benefit programs.”

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 

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