Tax Implications of Cryptocurrency
Just as “dollars” are the representation of United States currency, “coins” are the representation of cryptocurrencies. While you cannot hold crypto coins in your hand – they are virtual only, stored online – they are, nonetheless, considered taxable property by the IRS.
The IRS says,
“The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability.”
Virtual Currency Tax Consequences
Virtual currency has tax consequences if …
- It can be sold or exchanged into real-life currency,
- or it can be traded digitally,
- or it can be purchased or exchanged into other currencies,
- or it can be used in a transaction to pay for goods or services.
Cryptocurrency Tax Impact: Capital Gains Or Taxable Income
For those who own cryptocurrencies, they are considered property for federal tax purposes and are treated as a capital asset. Capital assets are taxed when you sell them and you make a profit.
If you spend or sell your crypto coins within one year of owning them, any profits from those transactions are short-term capital gains, which are taxed at your regular income tax rate.
If you spend or sell your crypto coins at after one year of owning them, any profits from those transactions are long-term capital gains, which are taxed at a lower rate.
When you spend or sell your crypto coins for less than you purchased them, taxes are not owed.
Cryptocurrency is considered taxable income by the IRS when you’ve earned it through mining it or if you received it through a marketing promotion or payment for goods or services.
In these situations, you will owe taxes on the cryptocurrency value on the day you received it. The value is measured in U.S. dollars and is taxed at your regular income tax rate.
Need Help Reporting Cryptocurrency on Your Taxes?
For guidance on tax requirements of virtual currencies, the IRS issued IRS Notice 2014-21 as well as a Frequently Asked Questions on Virtual Currency Transactions.
For help with your cryptocurrency tax planning and income tax preparation, give us a call.