The IRS has declared that cryptocurrencies are to be considered as “property.” To the IRS, exchanging property for money in this manner would be the same as selling a stock.
Therefore, the specific taxes you owe on any sales of cryptocurrencies is determined by how long you held the crypto, at what price you bought, the selling price, and your tax bracket.
Any profits are taxed at your capital gains tax rate. However, if your crypto lost value between buying and selling (or using it), it becomes a capital loss. This isn’t as bad as it sounds, because a capital loss can be used to counterbalance capital gains on your more successful trades.
Additionally, just like stocks, the length of time you hold the crypto is a major determining factor for what you might owe. If you held that crypto for more than a year and sell it (or use it for purchases) at a price more than you paid, you will owe taxes on the difference at your long-term capital gains rate. If you held that crypto for less than a year, you pay your short-term capital gains rate or your ordinary-income rate.
These capital gains taxes only come into effect when you sell your cryptocurrency or any time you trade one virtual currency for another. The initial purchase does not trigger a taxable event. You’ll need to keep track of when and at what price you bought your crypto to establish a cost basis. That will help determine potential taxes owed (and profits booked!) down the line.