Crypto Investments: Tax Implications And You

Cryptocurrency is a digital or virtual currency that exists on multiple computer systems worldwide. It has no central storage or issuing authority, and its transactions are generally tracked on a platform called the blockchain. As with other types of investments, profits or income from cryptocurrency are taxable. However, the taxation of cryptocurrency can be complex and depends on various factors, such as the type of transaction, the length of ownership, and the taxpayer's income.

Capital gains taxes on crypto sales

When you sell cryptocurrency for a profit, you are subject to capital gains taxes. The amount of tax you owe depends on the profit you make from the sale. This is similar to how capital gains taxes apply to the sale of stocks or other assets.

To calculate capital gains taxes on crypto, you need to know the cost basis of your cryptocurrency and the sale price. The cost basis is generally the amount you paid for the cryptocurrency, while the sale price is the amount you receive when you sell it. If the sale price is higher than the cost basis, you have a capital gain, and the profit is subject to taxation.

Tax Rates for Crypto Capital Gains

The tax rate on crypto capital gains depends on two main factors:

• How long you owned the cryptocurrency: If you owned the crypto for one year or less before selling, you'll pay short-term capital gains tax rates, which are typically higher. If you owned it for more than a year, you'll pay long-term capital gains tax rates, which are generally lower.
• Your annual income: Your taxable income determines your tax bracket, which impacts the tax rate you pay on capital gains. In general, higher income results in a higher tax rate.

Reporting Crypto Capital Gains

When reporting crypto capital gains, you'll need to use specific tax forms. In the US, for example, you would report crypto capital gains on IRS Form 8949 and Form 1040. It's important to keep detailed records of your crypto transactions, including dates, amounts, and market values, to accurately report your taxes.

Other Taxable Events for Crypto

It's important to note that capital gains taxes are not the only type of tax that may apply to cryptocurrency. Other taxable events related to crypto include:

• Converting one cryptocurrency to another: When you convert one crypto to another, it is considered a taxable event, and you may owe capital gains taxes on any profits.
• Spending crypto on goods and services: Using crypto to buy something is also a taxable event, and you'll likely owe capital gains taxes on any increase in value since you acquired the crypto.
• Getting paid in crypto: If you receive crypto as compensation from an employer, it is taxed as income according to your income tax bracket.
• Mining or staking crypto: Any rewards or earnings from mining or staking crypto are generally taxed as income, based on their fair market value at the time of receipt.

Non-Taxable Events for Crypto

Not all activities involving cryptocurrency trigger taxes. Some non-taxable events include:

• Buying and holding crypto: Simply purchasing and owning crypto is not a taxable event. Taxes are typically incurred when you sell or dispose of the crypto and realize gains.
• Donating crypto to a qualified charity: Donating crypto directly to a tax-exempt charitable organization may allow you to claim a charitable deduction.
• Receiving crypto as a gift: If you receive crypto as a gift, you generally won't incur taxes until you sell or engage in another taxable activity.
• Transferring crypto between wallets: Moving crypto between wallets you own is not a taxable event, as it does not result in any gains or losses.

Tips for Managing Crypto Taxes

To manage your crypto taxes effectively, consider the following:

• Keep accurate records: Maintain a detailed log of all your crypto transactions, including dates, amounts, and market values. This will make it easier to calculate gains or losses and report them accurately.
• Consult a tax professional: Crypto taxes can be complex, especially if you have a large number of transactions or specific situations like mining or staking rewards. Consider seeking advice from a certified accountant or tax professional familiar with crypto taxes.
• Use crypto tax software: There are crypto tax software platforms available that can help you track and organize your transactions, calculate gains or losses, and generate the necessary tax forms.

Crypto income is taxed based on its fair market value

For example, if you receive cryptocurrency as payment from an employer, it is taxed as compensation according to your income tax bracket. If you are a cryptocurrency miner, the value of your crypto at the time it was mined is taxed as income. Staking rewards are treated similarly, with taxes based on the fair market value of the rewards on the day they are received.

Crypto income is also taxed when it is exchanged for another form of payment. For example, if you use cryptocurrency to buy goods or services, you will likely owe taxes on the transaction. This is because, to the IRS, spending crypto is similar to selling it, and so it is subject to capital gains taxes.

The same is true if you convert one cryptocurrency to another. As you have to sell one crypto before buying another, the IRS considers this a taxable event. You will owe taxes if you sell your original crypto for more than you paid for it.

Crypto income is also taxed when it is cashed out. If you sell your crypto for more than you paid for it, you will owe taxes on the profit.

Crypto mining and staking rewards are taxable

The IRS has published guidance stating that staking rewards are included in gross income for the taxable year in which the taxpayer acquires dominion and control of the awarded cryptocurrency. Dominion and control refer to the taxpayer's ability to sell or transfer the asset. This treatment applies whether the taxpayer stakes directly to a proof-of-stake blockchain or receives additional tokens through staking on an exchange. The amount of taxable income is based on the reward's fair market value on the date the taxpayer gains dominion and control.

It is important to note that selling or trading the cryptocurrency you mined or staked will result in a capital gain or loss on that asset. As such, you will be required to report the disposition of your crypto assets on Form 8949.

Calculating your crypto income can be complex, and it is recommended that you consult a tax professional or use crypto tax software to ensure accurate reporting.

Crypto gifts and donations

Gifting and donating crypto are generally not taxable events in the US, but there are some exceptions and special cases to consider.

Giving Crypto as a Gift

If you give crypto as a gift, it is typically not a taxable event, and you don't have to pay taxes. However, if the value of the crypto gift exceeds a certain amount (between $15,000 and $18,000 for the 2023 and 2024 tax years, respectively), you may need to report it to the IRS and file a gift tax return (IRS Form 709). This is because you have exceeded the annual gift tax exclusion amount, which may change each year as determined by the IRS. It's important to note that gifts to a spouse are usually exempt from this reporting requirement.

Receiving Crypto as a Gift

Receiving crypto as a gift is also generally not a taxable event in the US, regardless of the amount. You don't need to report it on your income tax return or Form 8949. However, if you later sell or dispose of the crypto gift, it becomes a taxable event, and you will need to pay capital gains taxes.

To calculate your capital gains or losses, you will need to determine your cost basis in the crypto by considering the donor's cost basis and the fair market value (FMV) of the crypto at the time of the gift. If the FMV of the crypto at the time of the gift is higher than the donor's adjusted basis, you will inherit the donor's cost basis and holding period. On the other hand, if the FMV is lower than the donor's adjusted basis, your cost basis will depend on whether you have a gain or loss when disposing of the crypto.

Crypto Donations

Donating crypto to a registered charity or tax-exempt organisation is not a taxable event and can provide tax benefits. You may be eligible for a tax deduction equal to the fair market value of the crypto at the time of donation if you have held it for a certain period (usually more than one year). If you have held the crypto for a shorter period, the deduction amount may be limited to the lower of the crypto's cost basis or FMV.

To claim a tax deduction for crypto donations, you may need to report them on your tax return, and there may be additional requirements for donations exceeding a certain value (typically $5,000). It's important to ensure that the receiving organisation is set up to accept crypto donations and to keep proper records of your transactions.

Crypto tax reporting

• Buying cryptocurrency is not a taxable event. You can buy and hold crypto without incurring taxes, even if its value increases. Taxes are triggered when you sell, trade, or dispose of cryptocurrency.
• When you sell cryptocurrency for a profit, you realize a capital gain, just like with stocks or other investments. You will need to report this on your tax return and pay taxes on the gain.
• If you use cryptocurrency to purchase goods or services, you owe taxes on the increased value between the price you paid for the crypto and its value at the time you spent it. This is because you are essentially selling the crypto to make the purchase, triggering a taxable event.
• Cryptocurrency income, such as from mining, staking, or receiving crypto as payment for goods or services, is generally taxed as ordinary income. This income is subject to federal and state income taxes, which are not always withheld, so you may need to pay these taxes directly.
• To report your crypto taxes, you will typically use Form 1040 Schedule D to report capital gains and losses, and Form 8949 if you need to provide additional information or make adjustments.
• It is important to keep accurate records of your cryptocurrency transactions, including the amount spent, the date of acquisition, the date of sale or trade, and the proceeds or sales price. This information is necessary for calculating your crypto income, gains, and losses, and for reporting them on your tax return.
• Crypto brokers and exchanges are required to issue 1099 forms to their clients, which can help you keep track of your crypto transactions and income. However, it is your responsibility to ensure that you report all taxable events and income, even if you don't receive a 1099 form.

Frequently asked questions