Cryptocurrency (virtual currency or “crypto”) has been steadily growing since Bitcoin was first released in 2009. As people continue to invest, the tax implications are the big question on everyone’s mind.
Crypto can be used like normal currency (i.e., $USD) to purchase items, but for federal tax purposes, it is considered property, not currency.
Common transactions that trigger a taxable event
- Selling crypto for cash
- Gain or loss is calculated by taking cash proceeds less adjusted basis
- Paying for goods and services with crypto
- Gain or loss is calculated by taking the Fair Market Value (FMV) of the goods or services received less your adjusted basis
- Receiving crypto for goods and services
- Ordinary income is recognized for the FMV of the crypto on the date it is received. This also becomes your adjusted basis. It may also be subject to self-employment tax
- Exchanging one crypto for another
- Ex: Trading Bitcoin for Ethereum. Gain or loss is calculated by taking the FMV of the crypto received less your basis in the crypto given up
- Receiving crypto as wages from an employer
- FMV on the date the crypto is received will show up on your W-2 and is subject to payroll and income taxes
The character of the gain or loss from selling or exchanging crypto depends on how it is held in the taxpayer’s hands. If it is is held as a capital asset, then all sales/ exchanges will receive capital gains treatment. On the other hand, if it is held as inventory, by a dealer for example, gains and losses would be taxed at ordinary rates.
Gifting
Gifts of crypto to individuals or trusts are exempt if the gift is less than $15,000.
Gifts to charity are deductible if you itemize your deductions. The amount of the deduction depends on how long you have owned the crypto. Any disallowed deduction can be carried forward for the next five years.
Reporting
Taxpayers are required to keep accurate records for all crypto transactions. The default for calculating gains or losses is on a first-in-first-out basis. Exchanges will be required to issue a 1099-K if you have more than 200 transactions or proceeds of $20,000 or more. Some exchanges will report trades on a consolidated 1099 or 1099-B.
Consult your tax advisor with any questions.