How is Cryptocurrency taxed?

How is Cryptocurrency Taxed

Cryptocurrency has taken on a life of its own. The most popular cryptocurrencies traded tend to be $Bitcoin, $Ethereum, $Litecoin and our new friend $DOGE. People feel fascinated by the idea of a decentralized currency that allows them to have more control over their own wealth. Cryptocurrency is being used as a tool both to purchase items as well as an investment vehicle. Cryptocurrency is relatively new and many people don’t know that it needs to be taxed. In this blog, we’ll talk about how cryptocurrency is taxed.  People have even less information on cryptocurrency tax laws or how to report cryptocurrency on their tax returns. 

How Is Cryptocurrency Taxed?

To understand cryptocurrency tax laws, you first need to understand how the government sees cryptocurrency. From the government’s standpoint, cryptocurrency is property, not currency. 

This might seem like a frivolous distinction to make. However, in reality, it plays a large role in how cryptocurrency is taxed and when people owe taxes for cryptocurrency transactions.

If you are trying to understand how to report cryptocurrency taxes, you need to identify what the IRS refers to as “a realization event.” 

Cryptocurrency Tax Accounting and the Realization Event

Most people think there is no correlation between selling an object and tax consequences. This is especially true if they are thinking that they are going to lose money on the object that they are going to sell.

This is because they don’t see holding a tangible object as an investment vehicle. They are not looking at it from the standpoint of receiving gains when they ultimately sell the item. With cryptocurrency, when people sell the item, they expect to get more money for the item than what they paid for it. Herein lies the tax liability.

If a person purchases cryptocurrency or mines it, the value of the cryptocurrency is immediately taxable. They don’t need to sell the currency for a profit in order to have tax liability.

If a person takes cryptocurrency and exchanges it for USD or they use it to purchase goods and services, they will have to pay taxes on the realized value of the cryptocurrency. This happens if the value of the cryptocurrency is more than the price at which it was acquired. For example, if a person purchased Bitcoin when it was $0.10 a coin and now they are selling their Bitcoin for $38,000 a coin, they are going to be responsible for the capital gains tax on the $37,999.90 they have earned on their Bitcoin.

 

Good Record-Keeping and Cryptocurrency Tax Reporting

An important part of knowing how to report cryptocurrency on taxes is good record-keeping. You need to keep track of your cryptocurrency activity. Pay close attention to the year end reporting in your cryptocurrency and blockchain wallets of choice. Coinbase, Gemini, Binance and Robinhood are a few of the leading exchanges for crypto in which taxable transactions occur.

This means knowing the value of your cryptocurrency when you first purchased it and having records of the fair market value of the cryptocurrency when you sold it or used it to purchase something else. This information is essential to paying the right amount of money in taxes for your cryptocurrency.

If you buy and sell stocks, your broker is going to give you a 1099B form. This form gives you the values you would need to calculate your capital gains tax at the end of the year. You may not get this type of form if you are investing, buying, or mining cryptocurrency. Even if you don’t get this form or a 1099–K, you still owe taxes on your gains.

How To Go About Cryptocurrency Tax Planning

You may honestly not realize that you owe taxes. But the IRS will not take pity on you.

It is up to you to ask how cryptocurrency is taxed. 

Fusion CPA helps many clients with their capital gains taxes. We can help you make sure that you stay on the right side of the IRS with paying taxes on cryptocurrency. We can also help you keep track of your finances through our bookkeeping, tax planning, and general accounting services. Click the discovery button below to learn more.

This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.

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