The investing and use of Crypto has exploded in the past couple of years. In trying to keep up with it, the IRS has diligently been trying to figure out how to increase and enforce crypto tax compliance.
When it comes to crypto, the IRS can get you for taxes on quite a few different things. The biggest one that most people aren’t aware of is the trading of one cryptocurrency for another (for example Bitcoin for Monero) is a taxable event. You’ll quickly realize, just based on the taxation of conversions, that your taxes are going to get extremely complicated really quickly.
Before we get to the ‘how’ and ‘when’ crypto is taxed lets get the ‘why’. Basically, the IRS classifies cryptocurrency as property. Therefore, crypto transactions are going to be subject to the similar tax laws as property transactions. That is why crypto is taxable. Below we’ll discuss some of the common questions related to crypto.
When is it taxed? Taxes are due when you trade, sell, or dispose of crypto in any way and recognize a gain. If you dispose of crypto and you recognize a loss, you might be able to deduct that on your taxes.
Do I get taxed when I buy crypto? Not if you’re buying the crypto with USD. However, remember, trading for crypto can be a taxable event.
Am I taxed for holding crypto? No, holding the crypto is not a taxable event, even if it increases in value (unless you’re a billionaire).
How will the IRS know I own cryptocurrencies? Well, there’s a new question on the Form 1040 which gives you the chance to let the IRS know you own crypto. As a heads up, the IRS has a variety of ways to determine if you own crypto, even if you answer no on the Form 1040 so it’s best just to be honest and let them know.
What are the tax rates I’m looking at? Unfortunately, there isn’t a simple answer. It depends on your income bracket, tax filing status, and the length of time you owned the crypto before selling or trading it. If you owned it for 365 days or less, then you’ll pay short-term capital gains taxes. These are basically equal to income tax rates. If you owned the crypto for more than 365 days, then you’ll pay long-term capital gains taxes. You can find the specific federal tax brackets here.
What if I buy something with my crypto, is that a taxable event? Yes, unfortunately, that’s as if you converted the crypto to a fiat currency so it’s a taxable event.
Is the interest I receive on crypto taxable? What about staking? Is staking taxable? Yes, those are all taxable with specific rules not discussed above.
If you’re looking for a good crypto CPA to help you with your tax compliance, feel free to reach out.