When you first buy cryptocurrency, tax might be far from your mind. Maybe you’re excited to invest in a currency that’s increasing rapidly in value… or maybe you’ve been using cryptocurrency for years.
Whatever your situation, it’s crucial to know how cryptocurrency is taxed – and that’s what we’ll be covering here.
Note that this article applies to the United States only, and is not intended to replace professional advice. Do consult a tax professional on how best to arrange your affairs.
If you’re training to become a tax professional yourself, then of course you’ll want to be on top of how cryptocurrency is taxed – especially given CPA exam costs. This article should provide you with a good starting point.
Yes, Cryptocurrency IS Taxed … and Not How You Might Expect
Let’s clear up one possible misconception first: you do have to pay tax on your cryptocurrency gains. In fact, simply using Bitcoin or another cryptocurrency to make a purchase could incur a tax bill.
In the US, cryptocurrency can be treated either as income or as property, depending on how it’s being used.
When Bitcoin is Treated as Income
If you pay for goods or services in cryptocurrency, you should convert the value of the cryptocurrency into US dollars at the date payment is made. If you’re paid in cryptocurrency (e.g. as an employee) then you must report your total W-2 wages in dollars, too.
If you “mine” cryptocurrencies then that’s also taxed as income: if you earn from your mining activity, you should account for that in the dollar value it would have been worth on the day you mined the cryptocurrency.
When Bitcoin is Treated as Property
When it comes to holding bitcoin as a capital asset, though, it’s treated by the IRS as property.
So if you trade one cryptocurrency for another, or turn a cryptocurrency into dollars or another fiat currency, you need to report all transactions and related gains/losses, then pay taxes based on the total gains each year.
How is Tax on Cryptocurrencies Paid to the IRS?
Just like any taxed income or property gain, individuals should file taxes either quarterly (if you make a reasonable amount from cryptocurrency) or annually (for lower levels of gains). If you’re unsure how to file your taxes, you may want to consult with a professional.
You’ll need to complete and submit Form 8949 at tax time: this form reports your capital gains (and losses) from investment property.
If you hold most of your money in cryptocurrency rather than in US dollars, you’ll need to convert it to dollars to pay the IRS.
Will the IRS Really Bother Pursuing Cryptocurrency Tax?
In a word… yes!
Tax authorities are becoming increasingly savvy about cryptocurrency, and back in 2018, the IRS gained access to user information for specific high-transaction customers who used the platform in 2013-15.
Depending on your state, you may even be able to pay business taxes in cryptocoin: Ohio implemented this in December 2018.
When it comes to your personal taxes, don’t assume that you can simply avoid paying anything to the IRS. You could get into serious trouble and incur a hefty fine by doing so.
Should You Keep Your Own Records?
Although Coinbase and other online exchanges generally keep records for you, it’s important to also keep your own: what if the service goes down, or a particular type of transaction isn’t fully recorded?
What Counts as a “Taxable Event”?
There are a number of things you might do with cryptocurrency that count as “taxable events”, where you need to pay taxes on any gains. These include:
- Turning cryptocurrency into dollars, or any other fiat currency (legal tender, with the value backed by the government that issued it).
- Trading one cryptocurrency for another.
- Spending cryptocurrency for goods or services. You may also need to pay sales tax for these transactions.
- Mining coins: you’ll need to account for the dollar value of the coin at the time when you mined it.
They do not include:
- Buying cryptocurrency with dollars. You don’t incur taxable gains until you trade, use, or sell your cryptocurrency.
- Giving cryptocurrency as a gift (though if the gift is large, you may owe gift tax). The recipient will need to pay tax if/when they sell or trade the gift, though.
The tax situation with cryptocurrencies can seem murky, and if you’re unsure about how to correctly account for your trades, gains, and losses, or if you’re not confident about how much you owe the IRS, always consult a tax professional.
Bryce Welker is an active speaker, blogger, and tutor on accounting and finance. As the Founder of Crush The CPA Exam, he has helped thousands of candidates pass the CPA exam on their first attempt