Before you buy cryptocurrency through places like SoFi, you may want to consider the tax ramifications. The IRS considers cryptocurrencie to be standard property. So buying and selling Bitcoin is considered no different than buying or selling a car, art, or any other hard asset. If you make a profit on your sale, then the IRS will want its cut.
How Cryptocurrencies are taxed
If you sell your crypto and make a profit, then you must pay capital gains taxes. This occurs whether you bought the asset or received it in exchange for something. From the point of view of the IRS, it doesn’t matter how you acquired it; if you made money when you sold it, then you owe them money.
If you received the cryptocurrency as payment for work or in exchange for goods or services, then you must calculate the fair market value at the time you received it. You will use this valuation to calculate the taxes owed when you sell it.
If you exchange the cryptocurrency instead of selling it, this can still trigger a taxable event. In this case, the transaction will incur a higher rate in most cases as it will count as income.
In most cases, you cannot avoid paying taxes if you’ve made money on your crypto-based on these types of transactions.
You must either pay ordinary income taxes or capital gains taxes.
Because of these tax ramifications, make sure to think carefully before investing in a volatile asset such as cryptocurrency.
How to Manage Cash Flow
If you suspect you will have to pay taxes on your cryptocurrencies you can reduce your tax bill by controlling the timing. you are using your crypto to buy another asset, whether another coin or some other investment vehicle, make sure that you buy something that has approximately the same value as what you are selling. If you do this right, it can lower your tax bill.
Using Retirement Accounts
Traditionally, retirement accounts give people tax benefits. Thanks to the growing popularity of cryptocurrencies many retirement accounts allow people to buy crypto directly or to buy ETFs or companies that are related to cryptocurrencies
If you have an IRA or 401(k) portfolio, this can be a way to invest in cryptocurrencies with your pre-tax income, though you will eventually have to pay taxes on the gains. A Roth IRA will allow you to avoid paying taxes on gains but you can only invest with post-tax money. Because cryptocurrencies are so volatile, unless you are an experienced investor, you may want to talk to a financial advisor.
The Wash Sale Rule
One other thing to be aware of is the wash sale rule. Prior to the end of 2021, there was no such rule for crypto since the IRS considered it to be property and not a type of security. That meant you could buy a cryptocurrency at a loss and then turn around and repurchase it without any waiting period. This could be beneficial to those trying to make sure they managed their capital gains and losses to minimize their tax burden.
However, when you buy or sell cryptocurrency stocks or funds, you will not be able to repurchase them within a 30-day window.
This occurs whether you bought the asset or received it in exchange for something.Because cryptocurrencies are so volatile, unless you are an experienced investor, you may want to talk to a financial advisor.whether another coin or some other investment vehicle, make sure that you buy something that has approximately the same value as what you are selling. If you make a profit on your sale, then the IRS will want its cut.