Cryptocurrency Taxation

Calculating Short-term vs Long-term Capital Gains / Losses

Cryptocurrency taxation in the USA has been a topic of significant interest and scrutiny, especially as the adoption of digital currencies grows. The Internal Revenue Service (IRS) classifies cryptocurrencies, like Bitcoin, as property rather than currency. This distinction means that for tax purposes, selling, trading, or using cryptocurrencies to purchase goods or services incurs capital gains or losses, much like transacting with stocks or real estate.

When an individual sells or trades cryptocurrency, they are required to calculate the gain or loss compared to their acquisition cost. This involves determining the fair market value of the cryptocurrency at the time of the transaction. If the cryptocurrency has been held for over a year, it qualifies for long-term capital gains rates, which tend to be lower than short-term rates. However, if it's held for less than a year, any gains are considered short-term and are taxed at the individual's ordinary income tax rate. Additionally, if cryptocurrency is received as compensation for services (like wages or as a freelancer), it's taxed as ordinary income.