Understanding Crypto Taxes: Do You Owe Money?

Investing in cryptocurrency is exciting, but it's important to understand the tax implications. The IRS treats cryptocurrencies as property, so any profits or income from your investments are generally taxable. The tax treatment depends on how you acquired and used your crypto, with capital gains or income taxes applying in different situations. For example, selling crypto for a profit, using it to buy goods or services, or receiving it as payment are all taxable events. On the other hand, simply buying and holding crypto is not taxable, and donating it to charity can even lead to a tax deduction. To stay on the right side of the law, it's crucial to keep detailed records of your transactions and carefully report them on your tax returns.

Capital gains taxes on crypto sales

Capital gains taxes apply to cryptocurrency sales. If you sell a cryptocurrency for a profit, you will owe capital gains on that profit, just like you would on a share of stock. The rate of tax depends on how long you owned the cryptocurrency and your income.

If you sell a cryptocurrency for cash, you will owe taxes if you sell your assets for more than you paid for them. If you sell at a loss, you may be able to deduct that loss on your taxes.

If you use a cryptocurrency to buy goods or services, you will owe taxes on the increased value between the price you paid for the crypto and its value at the time you spent it, plus any other taxes you might trigger.

If you trade one cryptocurrency for another, this is also a taxable event. You will need to report any gains or losses.

Cryptocurrency capital gains and losses are reported on IRS form 8949, Sales and Dispositions of Capital Assets.

Crypto income is taxed based on its fair market value

The Internal Revenue Service (IRS) classifies cryptocurrencies as property, and so any profits or income from your cryptocurrency are taxable. The IRS treats cryptocurrencies as property for tax purposes, which means that you pay taxes on cryptocurrency if you sell or use your crypto in a transaction, and it is worth more than when you purchased it.

If the crypto was traded on an exchange, the trading price on the date of the transaction is often considered its fair market value. This value is typically denominated in US dollars or another fiat currency, providing a clear, quantifiable value for tax purposes. It is important to note that different exchanges may have slightly different prices, so it is best to consistently use the same exchange for valuation purposes to maintain consistency.

If the crypto transaction did not occur on an exchange, the fair market value is whatever the crypto was worth on the date it was received. There are several methods that can be used to determine this:

• Cost of Goods or Services: If the crypto was exchanged for goods or services, the value of those goods or services is used to establish a reasonable equivalent value.
• Peer-to-Peer Exchange Rate: If the transaction occurred in a peer-to-peer manner, the agreed-upon exchange rate between the parties can be used.
• Crypto Price Index: Several reputable crypto price indices aggregate prices from multiple exchanges to provide a reasonable equivalent value for your crypto at a specific date and time.

Crypto mining businesses are subject to capital gains tax

In the US, crypto mining rewards are taxed as income when received. This means that the value of the crypto at the time it was mined counts as income and is taxed at your regular income tax rate. If you later sell the crypto you mined and make a profit, you will also need to pay capital gains tax on that profit. This is because the US has two different taxable scenarios when it comes to crypto mining: income tax and capital gains tax.

The same rules apply in the UK. Crypto mining rewards are taxed as income, and if you later sell your mining rewards and make a profit, you will need to pay capital gains tax on that profit.

In Australia, hobby crypto miners are only subject to capital gains tax. If they sell their mining rewards and make a profit, they will pay capital gains tax on 50% of that profit. Business crypto miners, on the other hand, are subject to both income tax and capital gains tax.

In Canada, hobby crypto miners are also only subject to capital gains tax. If they sell their mining rewards and make a profit, they will pay capital gains tax on 50% of that profit. Business crypto miners are subject to income tax and capital gains tax.

Crypto is taxed like stocks and other types of property

If you hold a cryptocurrency, sell it, and profit, you owe capital gains on that profit, just as you would on a share of stock. Capital gains taxes are applied at both the federal and state levels (where applicable). They can be long-term or short-term, and how long you've held your crypto affects how much tax you'll end up owing. If you held onto your crypto for more than a year before selling, you'll generally pay a lower rate than if you sold right away. Long-term gains are taxed at a reduced capital gains rate. These rates (0%, 15%, or 20% at the federal level) vary based on your income. Higher-income taxpayers may also be subject to the 3.8% Net Investment Income Tax on their gains or other income. Short-term gains are taxed at your ordinary income rate, which is usually a higher, less-favorable rate.

The IRS classifies digital assets as property, and transactions involving them are taxable by law. Cryptocurrency income is taxed based on its fair market value on the date you receive it. If you receive cryptocurrency as a payment for providing a service, that is considered ordinary income. If you are an independent contractor, the cryptocurrency you receive is considered self-employment income. If you are an employer, the cryptocurrency you pay as wages is subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage, and Tax Statement.

Cryptocurrency sales are subject to capital gains taxes. If you sell cryptocurrency for a profit, you are taxed on the difference between your purchase price and the proceeds of the sale. Note that this doesn't only mean selling cryptocurrency for cash; it also includes exchanging your cryptocurrency directly for another cryptocurrency, and using cryptocurrency to pay for goods or services.

Crypto gains or losses must be reported on Form 8949

Before filling out Form 8949, you must declare that you have transacted in cryptocurrency on Form 1040. The IRS requires all filers to state whether they have received or sold digital currency in the relevant tax year.

On Form 8949, you will need to provide the following information about your crypto trades:

• Name of the cryptocurrency
• Date you acquired it
• Date you sold, traded, or otherwise disposed of it
• Proceeds or sales price

Form 8949 is divided into two sections: short-term and long-term. If you dispose of your assets after holding them for less than 12 months, they should be reported in the short-term section. If you dispose of your assets after holding them for more than 12 months, they should be reported in the long-term section. Long-term disposals are subject to more favourable tax rates.

After you have detailed all your transactions on Form 8949, total your entries and then transfer the information to the corresponding sections of Schedule D, which totals up your net capital gains and losses.

Frequently asked questions