An Overview of the U.S. Tax Implications of Cryptocurrency
The tax implications of cryptocurrencies have been in the limelight recently as the IRS has started cracking down on cryptocurrency related audits. These recent developments have led to confusion due to the amount of misinformation present on the web. In this guide, we walk through the basics of cryptocurrency taxes as well as the high level items you need to be aware of as a cryptocurrency investor.
How does the IRS treat crypto?
The IRS (the tax collecting agency of the United States) treats all cryptocurrencies as property for tax purposes. This means that buying bitcoin or any other crypto is treated like an investment that can generate income when you sell or trade the asset.
Other forms of property include stocks, bonds, and real-estate, and the tax implication for these assets generally works the same as they do for cryptocurrencies.
For example, if you were to buy Tesla stock for $100 and two months later sell it for $200, you would incur a $100 capital gain which gets reported on your taxes.
The same rules apply to cryptocurrency.
John is a cryptocurrency investor. In April, he buys $10,000 of BTC through popular exchange Coinbase. Four months later, John sells all of his BTC for $12,000.
Similar to the Tesla stock example, John incurs a $2,000 capital gain from the disposal of his BTC. This is a form of income that gets reported on John’s tax return, and he will owe a percentage of tax on this gain depending on his personal income tax bracket.
Does trading one crypto for another count as a taxable sale?
Yes. This is one of the most commonly misunderstood items within the world of crypto capital gains and losses tax reporting.
As laid out in the official IRS guidance updated in 2019, exchanging one cryptocurrency for another cryptocurrency is considered a disposal, meaning you realize a gain or loss on the transaction.
Emily buys 1 bitcoin for $7,000 in July. Two months later in September, she trades that 1 BTC for 70 Ethereum. At the time of the trade, 70 ETH were worth $8,000.
In this example, Emily realizes a taxable event when she trades her BTC for ETH (this is considered to be a disposal of BTC). Thus, Emily realizes a $1,000 capital gain from this transaction ($8,000 – $7,000).
Do you have to report crypto losses?
The losses you incur from your crypto trading need to be reported on your taxes. The good news is that your crypto losses will actually reduce the total amount you owe in taxes.
Joseph purchases $5,000 of dogecoin in February. Over the course of the next five months, Joseph’s dogecoin significantly declines in value. Finally, Joseph decides to sell all of his dogecoin for $3,000.
In this example, Joseph has incurred a $2,000 capital loss. This is loss gets reported on Joseph’s tax return and it actually reduces his taxable income by $2,000, thus saving him a large portion on taxes due.
Mining, staking, and other forms of crypto income
Crypto earned from mining, staking, or a job, is also a form of taxable income; however, it is not considered capital gains income like the examples discussed above.
To properly calculate the amount of income you earned from your mining or staking rewards, you need to calculate the fair market value in US Dollar of your reward at the time you received it. You then simply sum up all of your income and report this with your taxes.
John runs a crypto mining rig in his basement. He has received the following payments to his wallet address over the course of the past month:
- 0.01 BTC, June 10, 12:00 PM
- 0.02 BTC, June 17, 12:00 PM
- 0.03 BTC, June 24, 12:00 PM
At the time of receiving these payouts, the fair market value of John’s BTC rewards were $100, $200, and $300 respectively.
In this example, John would recognize $600 of income from his bitcoin mining activity on his taxes. For more details on the tax reporting process, you can review this crypto tax guide.
The same process works for cryptocurrencies that you received from staking rewards or other income sources, like crypto you received as payment for a job or service.
Tax reporting doesn’t have to be a headache. If you take the time to learn the basics of how bitcoin and other cryptocurrencies are treated from a tax perspective and keep proper records, you will have no troubles reporting your crypto-related income at the end of the year.
Additionally, over the past years specialized cryptocurrency tax software has been developed to automate the entire process of tax reporting for crypto and bitcoin investors. If you have a high volume of transactions or have been trading on multiple exchanges, it could be beneficial to test out these tools.