Cryptocurrency, having made its presence felt globally as an investment asset, is no longer unfamiliar to the IRS. The tax rules concerning cryptocurrency, however, remain somewhat convoluted. According to the IRS, crypto may be subject to either income taxes or capital gains taxes, depending on its usage.

Cryptocurrency is not taxed if you're merely holding it, or "hodling" as the crypto community often refers to it. But if you've gained any income from crypto in a year—either from staking, lending, or selling—you may owe taxes on those proceeds. The IRS treats all cryptocurrencies as capital assets, which means you owe capital gains taxes when they’re sold at a profit. This treatment is similar to what happens when you sell more traditional securities, like stocks or funds, for a gain.

For instance, if you bought $1,000 in Ethereum and then sold the coins later for $1,600, you'll need to report that $600 capital gain on your taxes. The taxes you owe depend on the length of time you held your coins. If you held your Ethereum for one year or less, the $600 profit would be taxed as a short-term capital gain. Short-term capital gains are taxed the same as regular income, and that means your adjusted gross income (AGI) determines the tax rate you pay. As of 2023, federal income tax brackets top out at a rate of 37%. To be in the top bracket for 2023, you would need to make $578,126 or more as a single filer.

However, if you held your Ethereum for one year or more before you sold them for a profit, you would qualify for the long-term capital gains rate, which is lower than regular income taxes for many filers, depending on your AGI.

Other ways of earning cryptocurrency, such as mining, promotions, or receiving it as payment for goods or services, also count as regular taxable income. The entire value of the crypto on the day you receive it is taxed at your marginal income tax rate. Cryptocurrency earned through yield-earning products like staking is also considered to be regular taxable income.

When you hold cryptocurrency from any of these activities, and either spend or sell it later for more than its value when you first received it, you owe short- or long-term capital gains taxes on the profits, based on how long you’ve held it.

Lastly, if you sold your cryptocurrency for less than you paid for it, resulting in a loss, you can deduct some of your loss from your taxes. This is referred to as a capital loss.

This introduction provides a general understanding of cryptocurrency taxation. In the following sections, we will delve into the specifics of these taxation processes and explore strategies for navigating the complex world of digital asset taxes.

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