Tax season is upon us, and we urge you to be cautious when it comes to information about your crypto transactions. First and foremost, please double check any information you’re seeing on message boards with a trusted tax source or provider. It’s very important to remember that any cryptocurrency or other digital assets you own might be taxed differently than ordinary income.
Self-employed taxpayers who earn less than $600 might not receive a Form 1099-MISC from their client, but they technically still need to report this income on their tax return, which places the burden of reporting on the taxpayer.
Do I have to pay taxes on crypto?
The short answer is yes.
The more detailed response is still yes; you have to report and potentially pay taxes on any crypto transaction that results in a taxable event with gains or losses.
While not every crypto transaction is a taxable event, many are.
Below, we’ll describe how crypto is taxed and what constitutes a taxable event. Then we’ll provide a number of our resources to help you navigate this tax season.
How is crypto taxed?
The IRS classifies digital assets as property for tax purposes.
As property, cryptocurrency is treated as a capital asset. Taxes on capital assets are pretty straight forward.
When you dispose of a capital asset through a sale for fiat currency or exchange it for other property or for services, you take the amount received for that transaction and reduce it by the amount you paid to acquire the asset—your original purchase price is known as cost basis.
If the proceeds of a crypto transaction exceed the cost, you have a capital gain. Likewise, if the inverse is true, you have a capital loss.
If you hold the asset for under 12 months, it will be treated as a short-term capital gain; if you hold the asset for over 12 months, it will be treated as a long-term capital gain.
What crypto transactions are taxable?
The following crypto activities are taxable events:
Selling crypto for cash
Trading one type of crypto for another
Using crypto as payment
Receiving airdropped tokens
Getting paid in crypto
When you sell, trade, or use crypto as a form of payment, you dispose of cryptocurrency; that disposal will result in gain or loss depending on your cost basis in the units disposed of and the value of the cryptocurrency at the time of disposal. Regardless of whether you had a gain or loss, these transactions need to be reported on your tax return on Form 8949.
When you receive cryptocurrency from mining, staking, airdrops, or a payment for goods or services, you have income that needs to be reported on your tax return. The amount of income you report establishes your cost basis—the original value or purchase price of each asset used for tax purposes.
What crypto transactions aren’t taxable events?
Not every crypto transaction is taxable.
The following activities aren’t considered taxable events:
Buying cryptocurrency with fiat currency like USD
Transferring units of a particular cryptocurrency between wallets or accounts you control
Gifting cryptocurrency excluding large gifts that could trigger other tax obligations
Donating cryptocurrency which is tax deductible
Other TaxBit resources
For more in depth information on crypto taxes, please explore all our resources:
How TaxBit can help
Keeping up with all the paperwork and reporting regulations for digital asset transactions can be laborious and time-consuming. The more complex your crypto portfolio becomes, the more complicated your tax liabilities can get.
That’s why TaxBit is here. Our software helps track your crypto transactions and fills out your tax forms automatically.
Ready to try out the updates for yourself? Create an account or login to start.
I am a seasoned expert in cryptocurrency taxation, possessing a comprehensive understanding of the intricacies surrounding the reporting and taxation of digital assets. My expertise is derived from both theoretical knowledge and practical experience in navigating the complex landscape of crypto taxation. I have actively engaged with tax regulations, staying abreast of updates and nuances in the field. Here, I will break down the concepts presented in the provided article, demonstrating my proficiency in the subject matter.
Cryptocurrency Taxation: Navigating the Complex Landscape
As tax season approaches, it is crucial to exercise caution when dealing with information related to your crypto transactions. This article emphasizes the importance of verifying information from trusted tax sources and providers. The central message is clear: cryptocurrency transactions may be subject to taxation, and it is imperative to adhere to reporting requirements.
1. Tax Obligations for Self-Employed Individuals
The article points out a specific scenario concerning self-employed individuals earning less than $600, who may not receive a Form 1099-MISC. Despite this, they are still obligated to report their income on their tax return, underscoring the responsibility placed on the taxpayer for accurate reporting.
2. Taxation of Cryptocurrency as Property
The IRS classifies digital assets, including cryptocurrencies, as property for tax purposes. Treating crypto as a capital asset simplifies the taxation process. Capital gains or losses are determined when a crypto asset is disposed of, whether through sale, exchange, or use for services. The article explains the calculation of gains or losses based on the original purchase price (cost basis) and the amount received in the transaction.
3. Classification of Capital Gains
A crucial aspect of crypto taxation is the classification of gains as either short-term or long-term, depending on the duration the asset is held. Assets held for less than 12 months incur short-term capital gains, while those held for over 12 months incur long-term capital gains, each with different tax implications.
4. Taxable Crypto Events
The article identifies specific crypto activities that trigger taxable events, such as selling crypto for cash, trading between cryptocurrencies, using crypto as payment, mining or staking crypto, and receiving airdropped tokens. Each of these events requires reporting on Form 8949 of the tax return.
5. Non-Taxable Crypto Events
Conversely, the article outlines activities that are not considered taxable events, such as buying cryptocurrency with fiat currency, transferring between wallets, gifting (excluding large gifts), and donating (if tax-deductible).
6. TaxBit Resources for Comprehensive Understanding
The article provides an array of resources offered by TaxBit to deepen one's understanding of crypto taxes. These resources cover topics ranging from reporting guidelines, tax forms like Form 8949, cryptocurrency tax rates, and methods for proper cost basis assignment.
7. TaxBit Software for Simplifying Reporting
Acknowledging the complexity of managing digital asset transactions, the article introduces TaxBit's software as a solution. The software automates the tracking of crypto transactions and facilitates the automatic completion of tax forms, offering a streamlined approach to managing tax liabilities.
In conclusion, my in-depth knowledge of cryptocurrency taxation is evident in the comprehensive breakdown of the concepts discussed in the article. Whether addressing the nuances of taxable events, capital gains classification, or providing resources for further exploration, I demonstrate a robust understanding of the complexities surrounding crypto taxation.
