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Cryptocurrency – Tax Implication Breakdown

As cryptocurrency continues to become a more and more commonly used thing, there are a lot of potential tax implications you should know about before jumping on board. U.S. taxpayers are required to report crypto sales, conversions, payments, and income to the IRS and state tax authorities (where applicable). Each of these previously mentioned transactions has different tax implications, to learn more, keep on reading.

Break Down

To understand if you owe taxes, first, you will need to decipher if how you used the transaction was a taxable event or a non-taxable event. Past this, the transactions considered taxable will be handled differently depending upon a few other factors. Firstly, in the U.S. crypto is considered a digital asset, and the IRS treats it similar to stocks, bonds, and other capital assets. This distinction then opens up cryptocurrency to be taxed at different rates, and as capital gains or as income depending on how the crypto was obtained and how long it was held for.

Taxable vs. Non Taxable Events

To break down how differently crypto can be taxed, we will be breaking down what types of transactions belong to non-taxable events. After this, we will further break down the taxable events into those taxable as capital gains and taxable as income.

Non-Taxable
  • Buying and holding Crypto – Buying and holding is not a taxable event, however, once the asset is in your possession tax may occur when selling it down the road
  • Receiving as a Gift – Not a taxable event!
  • Giving a Gift – As long as the crypto was not used to purchase anything, no tax will be applied to this with the exception of potential gift tax being added if the transaction exceeds $15,000
  • Transferring crypto between your own wallets – Not a taxable event, however when transferring you should record the cost basis (the original value of an asset) as it will affect the tax on gains you’ve made if you choose to sell at a later date
Taxable as Capital Gains
  • Selling cryptocurrency for cash – If you are selling the crypto for a gain, you will owe taxes; additionally, if you sell at a loss you may be able to deduct the loss from your taxes
  • Converting Crypto – When transferring from one digital currency to another, you will technically need to sell the asset you have before acquiring the new one. Due to this sale, the IRS considers this a taxable event
  • Spending Crypto on goods and services – When purchasing a good or service you will likely owe taxes on the transaction. Similar to converting crypto, the IRS considers this transfer a taxable event because you will first need to “sell” the crypto before it is exchanged for the good or service
Taxable as Income
  • Mining Cryptocurrency – If you have mined crypto, you will owe taxes on the earnings based upon the time the coin was mined. Additionally, cryptocurrency mining as a business is taxed as a self-employment income.
  • Receiving rewards and incentives – There is a multitude of reasons why you may accept/receive free cryptocurrency such as receiving a free $5 for referring a friend. No matter how the crypto was obtained you will need to report these as income, which will be taxed

Wrap-Up

After reading you may be realizing you may owe tax on some of the activities you’ve been involved in with cryptocurrency. Now that you’ve realized this, you may be asking, what now? Your next step should be to compile any and all documents you have related to cryptocurrency transactions to best estimate how much you will owe in taxes. Follow along with this series in coming weeks for a breakdown of how you can calculate an estimate of how much you will owe in taxes on cryptocurrency.

Want to Learn more about how Crypto is taxed? Feel free to give us a call at 516-541-6549. And don’t forget to visit our website for more news updates!

 
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