How are Bitcoins and other crypto currencies taxed?
If I buy Bitcoin and Litecoin from Coinbase and leave it in my crypto wallet (e.g. Coinbase wallet) long-term without spending it or exchanging it, do I still get taxed if the value goes up or only if I withdraw it as US dollars?
In a 2014 ruling, the IRS deemed that Bitcoin and other cryptocurrencies are property--not currency--for tax purposes.
This means that you do not owe tax on any gains in Bitcoins until you either sell or dispose of them. This is like most capital assets - stocks, real estate, etc.
Notably, you may owe tax not only if you sell the bitcoin and withdraw the US dollars, but also if you use the bitcoin as payment for goods or services. So, if you bought 1 bitcoin for $1,000 a few years ago, which is worth around $4,200 today, and you use that bitcoin to buy $4,200 worth of stuff on the internet, my understanding is that you are on the hook for long-term capital gains tax on $3,200. I believe the IRS looks at it the same whether you are redeeming the bitcoin for $4,200 US dollars by selling it on a Bitcoin exchange, or $4,200 worth of stuff on the internet by making a purchase.
If you started speculating on Bitcoin within the past year, i.e. you have held Bitcoin for less than 365 days, you will be subject to short-term capital gains tax if you sell today. Short-term capital gains are effectively treated as ordinary income on your tax return, while long-term capital gains are taxed a lower, preferential rate. As with any capital asset where you have a gain and have held less than one year, you have to take a calculated risk: 1) Lock in your profit now, but pay a higher tax rate, or 2) Ride it out until you have held for a year or more to get a lower tax rate on the gains, but in that waiting time you risk that the asset declines in value.
Hope this helps!
Short term trading gains are taxed as ordinary income. Long term appreciation is taxed at long term capital gains rates. But it seems that the tax authorities dont have a way to track crypto currencies, so the reporting is voluntary if you want to be compliant.