As the Internal Revenue Service (IRS) states, they consider crypto as a convertible virtual currency. So, any profits you get from your crypto wallet might get taxed. But things aren’t that black and white. Whether crypto will be taxed or not depends on many factors.
You can use cryptocurrency in many ways; you can buy it, receive it as a gift, earn it, make purchases with it, and so on. Every single way in which you handle it has unique regulations set in place. Whatever the case is, you should be familiar with the rules surrounding crypto and taxes so the IRS can’t surprise you.
Key Takeaways
- Cryptocurrency taxation is influenced by various factors, including how it was acquired and used, your income, and your tax status.
- Each transaction involving cryptocurrency carries unique tax implications, so it’s essential to understand the rules to avoid surprises from the IRS.
- Taxable events in the crypto world include using crypto in transactions, receiving crypto as payment for services, mining, and participating in certain blockchain activities.
- Not all crypto activities are taxable; exceptions include buying and holding crypto, donating crypto to charity, receiving crypto as a gift, giving crypto as a gift within certain limits, and transferring crypto between your wallets.
- While cryptocurrency taxation is complex, it’s crucial to comply with tax regulations to avoid penalties. Consulting a knowledgeable accountant can help ensure accurate reporting.
In Which Cases Is Cryptocurrency Taxed?
It’s important to know when your crypto is being taxed so that you can use it smartly and without any unexpected shocks. So, here it is:
- Using your crypto in a transaction, even if you sell it and have a profit will trigger the cause for taxing.
- If someone pays for your services in crypto, that’s considered a business income and is taxed.
- Mining is also a cause for paying taxes. Also, if you receive an award in the form of crypto for doing some work on a blockchain, that will be taxed as income.
How Do Taxes Work in the Crypto World?
As we mentioned earlier, the IRS views cryptocurrency as assets – which triggers taxes. Every gain you make needs to be taxed, whether from cashing in, selling, exchanging, or simply using crypto that’s grown in value.
Let’s see that in an example:
Suppose you purchased 1 BTC at $8,500 and later sold it for $10,500 after six months, you would be liable for taxes on the $2,000 profit at the short-term capital gains tax rate. Gains from the sale of assets held for less than one year are subject to taxation at your standard tax rate. In the tax year 2024, this rate ranges from 10% to 39.6%, depending on your income level.
Now let’s say this same exchange took place one year after you’ve purchased crypto, you would own capital gains taxes, long term. This is similar to how taxes work on regular “nondigital” assets and properties.
Types of Cryptocurrency Tax Events
Taxable events:
- Selling a digital asset for fiat currency.
- Receiving a new digital asset as a result of a hard fork.
- Trading a digital asset for property, goods, or services.
- Swapping one digital asset for another digital asset.
- Receiving a digital asset as payment for goods or services.
- Obtaining a digital asset through an airdrop.
- Any other transfer of a financial interest in a digital asset.
- Receiving a new digital asset from mining or staking activities.
Not taxable:
Buying and Holding Crypto: Just getting some crypto and stashing it away isn’t a tax trigger by itself. Usually, taxes come into play down the road when you decide to cash out and lock in those gains.
Donating Crypto to Charity: If you’re feeling generous and send some crypto to a qualified non-profit, you can relax cause the IRS won’t tax you.
Receiving Crypto as a Gift: If you’re lucky enough to have some crypto land in your lap as a gift, you’re in the clear. There will be no tax until you decide to sell it off or try something like staking.
Giving Crypto as a Gift: If you wish to spread love, you can give up to $18,000 in crypto for 2024 without worrying about taxes. But if you’re feeling extra generous and exceed those limits, you’ll have to file a gift tax return. No need to stress though, as it typically doesn’t mean shelling out cash right away. Just keep in mind that even if it wasn’t your intention, transferring crypto outside of a purchase might still count as a gift.
Transferring Crypto to Yourself: Moving crypto between your wallets or accounts doesn’t ring any tax bells. You can simply carry over the initial cost and acquisition date to keep tabs on your potential tax impact for when the time comes to cash out.
Fun Fact:
The first Bitcoin purchase ever made was for two pizzas in 2010. If the buyer held onto those Bitcoins instead of spending them, they would be worth millions of dollars today. Interestingly, the buyer of those pizzas likely did not report any capital gains tax on the transaction, as cryptocurrency taxation was largely unregulated at that time, even though they bought the pizzas with Bitcoin.
Calculating Crypto Income
If you’re a taxpayer in the United States, you’re likely familiar with seeing federal and state income taxes deducted from your paycheck. However, the IRS also subjects any crypto you earn as income – whether through mining, staking, or rewards – to income taxes, which typically aren’t automatically withheld.
When you report your earnings, you’ll owe taxes based on the income tax rate corresponding to your tax bracket. It’s worth noting that if you’ve earned a significant amount from crypto activities, it could bump you into a higher tax bracket, resulting in a higher tax rate on a portion of your earnings.
Examples of Cryptocurrency Tax Events
Making a Purchase with Crypto
Purchasing things with cryptocurrency is getting more and more popular, and easier than ever. At the time of your purchase, you’ll need to pay a sales tax. Here’s a simple example that shows how it would work if you were to buy a candy:
You transfer cryptocurrency from your crypto wallet to the candy store and include the tax for the sale. But here’s the trick, if the value of your crypto is higher at the time of buying candy, then when you purchased it – you have created a taxable event with a realized capital gain. If the value of your crypto is lower – that’s a capital loss.
In summary, you’re getting taxed twice if you use cryptocurrency whose value has increased – for sales tax and capital gains tax.
Buying Cryptocurrency
Let’s start with an example of buying a Bitcoin that has increased in value from the time you bought it.
| Initial Purchase | One bitcoin (BTC) was bought for approximately $3,700 in early 2019. |
|---|---|
| Subsequent Value | In late February 2022, the value of 1 BTC rose to $38,500 |
| Potential Use | The increased value could have been used to purchase a car. |
Taxes and Mining Cryptocurrency
If you are mining cryptocurrency, the regulations are a bit different. As a miner, you are responsible for validating cryptocurrency transactions and adding them to the blockchain. The earning rewards in cryptocurrency are then treated as ordinary income unless the mining is related to a business venture, in which case it will be treated as business income.
Taxes and Cryptocurrency Staking
Staking involves depositing your cryptocurrency as collateral on the blockchain to serve as a transaction validator, earning compensation in return. When you own crypto that’s on a blockchain using staking, income tax is mandatory for every income you make. The fees you receive are taxed as income in the year you receive them.
Do I Need to Pay Taxes on Cryptocurrency?
The amount and type of taxes depend on various factors, such as how you obtained and utilized your cryptocurrency. Your income level and your tax classification are also crucial, so yes, paying taxes on cryptocurrency is mandatory.
Do I Need to Report Crypto Transactions Below $1000?
If your total income, including crypto earnings, is below the minimum threshold, you don’t need to report it. But for your safety, make sure to file because there’s a chance that you could potentially qualify for a refund.
If your income is above the minimum filing threshold, you need to report all crypto transactions. That’s for both capital gains and losses.
The Bottom Line
Taxing cryptocurrency is complex because it depends on various factors. It’s important to determine the nature of both income and capital gains. Keeping in mind everything we’ve told you so far, it’s best to be safe and consult someone familiar with taxing cryptocurrency, whether a lawyer or an accountant.
Whether you’re buying, selling, mining, or staking crypto, being aware of your tax obligations ensures financial compliance and peace of mind. Remember, staying informed and proactive is key to managing cryptocurrency taxes effectively.
Disclaimer
FAQ
Not all cryptocurrency transactions trigger taxes. Buying and holding, transferring between wallets, and receiving it as a gift, for example, aren't taxable events.
Taxable events include selling for fiat, trading one crypto for another, receiving crypto as payment, and earning through mining or staking.
Yes, reporting losses from cryptocurrency transactions can help reduce your overall tax liability by offsetting other capital gains.
Keeping detailed records, holding for longer periods for favorable tax rates, and using losses to offset gains are strategies to minimize tax liability.
