Crypto Tax: What Investors Need To Know

Investing in cryptocurrencies like Bitcoin and Ethereum has become increasingly popular, but it's important to understand the tax implications. The IRS treats cryptocurrencies as property, and any profits or income from them are generally taxable. Buying crypto is not a taxable event, but selling, exchanging, or using crypto to purchase goods and services can trigger capital gains taxes or ordinary income taxes, depending on how long you've held the crypto. Crypto mining, staking rewards, and gifts also have specific tax considerations. Accurate record-keeping and consulting a tax professional are crucial to ensure compliance with crypto tax laws.

Capital gains on crypto

Crypto is taxed like stocks and other types of property. When you sell or dispose of crypto, you're required to pay taxes on the amount of the gain. The tax rate for crypto gains is the same as capital gains taxes for stocks.

Capital gains taxes on crypto

The Internal Revenue Service (IRS) treats cryptocurrencies as property for tax purposes. This 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. This is because you trigger capital gains or losses if its market value has changed.

If you receive crypto as payment for business purposes, it is taxed as business income. If you successfully mine a cryptocurrency or are awarded it for work done on a blockchain, it is taxed as ordinary income.

For example, if you bought 1 BTC at $6,000 and sold it at $8,000 three months later, you'd owe taxes on the $2,000 gain at the short-term capital gains tax rate. Profits on the sale of assets held for less than a year are taxable at your usual tax rate. For the 2024 tax year, that's between 0% and 37%, depending on your income.

If the same trade took place a year or more after the crypto purchase, you'd owe long-term capital gains taxes. Depending on your overall taxable income, that would be 0%, 15%, or 20% for the 2024 tax year.

Crypto tax events

Taxable events related to cryptocurrency include:

• Sale of a digital asset for fiat
• Exchange of a digital asset for property, goods, or services
• Exchange or trade of one digital asset for another digital asset
• Receipt of a digital asset as payment for goods or services
• Receipt of a new digital asset as a result of a hard fork
• Receipt of a new digital asset as a result of mining or staking activities
• Receipt of a digital asset as a result of an airdrop
• Any other disposition of a financial interest in a digital asset

Crypto tax reporting

To be accurate when reporting your taxes, you'll need to ensure that with each cryptocurrency transaction, you log the amount you spent and its market value at the time you used it so you can refer to it at tax time.

Crypto tax forms

Crypto gains and losses are reported on Form 8949. To fill out this form, provide the following information about your crypto trades:

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

Crypto income tax

• Taxable Events: Buying cryptocurrency is not a taxable event in most countries. However, selling, trading, or disposing of cryptocurrency is usually a taxable event. This includes using cryptocurrency to purchase goods or services.
• Capital Gains Tax: In many countries, including the United States, cryptocurrency sales are subject to Capital Gains Tax. The tax rate depends on the duration of ownership and the taxpayer's income level. Short-term capital gains (holdings of less than a year) are typically taxed at the same rate as the taxpayer's income tax rate. Long-term capital gains (holdings of more than a year) are often taxed at a lower rate.
• Income Tax: In addition to capital gains tax, certain cryptocurrency transactions may be subject to income tax. For example, if you receive cryptocurrency as payment for goods or services, it is usually taxed as business income. Mining cryptocurrency or receiving it through staking or hard forks is generally taxed as ordinary income.
• Reporting Requirements: It is essential to maintain detailed records of your cryptocurrency transactions, including dates, fair market values, and capital gains or losses. These records are necessary for accurately reporting your crypto income and calculating your tax liability.
• Gift and Donation Exceptions: In some countries, gifting or donating cryptocurrency may be exempt from certain taxes. For example, in the United States, gifting crypto under a certain amount (currently $17,000 annually) is tax-free. Additionally, donating crypto to a registered charitable organization typically does not incur capital gains tax, and the donation amount may be tax-deductible.
• Compliance and Penalties: Non-compliance with crypto income tax regulations can result in penalties. For example, the IRS has been actively pursuing crypto tax compliance and sending warning letters to taxpayers who may be underreporting or evading crypto-related taxes.

Crypto as a gift

In the US, the Internal Revenue Service (IRS) treats cryptocurrencies as property for tax purposes. This means that if you sell or use crypto in a transaction, and it is worth more than when you bought it, you will owe capital gains tax on the profit. The same is true if you exchange crypto for another type of digital asset, goods, or services.

However, if you are gifting crypto to a third party, this is not a taxable event, according to the IRS. This is the case even if the crypto has increased in value since you bought it. So, if you give crypto as a gift, you don't need to worry about paying taxes on it.

There are several ways to give crypto as a gift. One simple method is to use a platform like Coinbase or Cash App, which allow you to send crypto to another user's account. You can also use a paper wallet, which involves printing out a piece of paper with all the details the recipient needs to access the crypto, including a private and public key. Another option is to buy a hardware crypto wallet, which will keep the recipient's digital assets secure.

Crypto gifts could be a good option if you're looking for something novel to give to a loved one, and they may even end up thanking you years later if the crypto increases in value.

Crypto mining tax

Taxation of Crypto Mining Rewards

Crypto mining rewards are generally subject to income tax in most countries, including the United States. The income tax is based on the fair market value of the mining rewards on the day they are received. This fair market value also serves as the cost basis for calculating capital gains or losses when you dispose of your mining rewards.

Capital Gains Tax

In addition to income tax, you may also be subject to capital gains tax when you dispose of your mining rewards. A disposal event can include trading your cryptocurrency for fiat currency, exchanging it for other cryptocurrencies, or using it to purchase goods and services. The capital gain or loss is calculated by subtracting the cost basis (fair market value when received) from the sale price or fair market value at the time of disposal.

Business vs. Hobby Mining

The tax treatment of crypto mining income can vary depending on whether it is considered a business activity or a hobby. If you are a hobby miner, your mining income will be reported as "Other Income" on your tax return, and you won't be able to deduct mining-related expenses. On the other hand, if your mining operation is classified as a business, you can deduct various expenses, such as equipment costs, repairs, office space, and home office deductions. It's important to consult with a qualified accountant to determine the appropriate classification of your mining activities.

Tax Deductions for Mining Businesses

If your mining operation is established as a business, you can take advantage of tax deductions to reduce your tax liability. Mining equipment, repairs, electricity costs, and rental space are some examples of expenses that can be deducted from your tax bill. However, it's important to maintain detailed records of these expenses, especially for "mixed-use" expenses that have both business and personal components.

Reporting Requirements and Consequences of Non-Compliance

It is crucial to report your crypto mining income and any gains or losses from disposing of mining rewards on your tax returns. Failing to do so constitutes tax evasion and can result in penalties, fines, and even prison time. The IRS is actively focusing on crypto tax evaders and increasing audits, so accurate reporting is essential.

To simplify the process of tracking and reporting your crypto mining taxes, you can utilise crypto mining tax software such as CoinLedger or Koinly. These platforms allow you to sync your mining transactions, automatically calculate fair market values, generate tax reports, and stay compliant with tax regulations.

Crypto tax reporting

• The Internal Revenue Service (IRS) classifies cryptocurrencies as property for tax purposes. This means that any profits or income derived from cryptocurrency transactions are generally taxable.
• Crypto taxes depend on the type of transaction and the taxpayer's circumstances. For example, if you sell or exchange cryptocurrency, you will likely need to report capital gains or losses on Schedule D and Form 8949.
• Cryptocurrency income, such as earnings from mining or staking activities, is typically taxed as ordinary income at its fair market value on the date it is received.
• The tax consequences of crypto transactions depend on the length of time the asset was held. Short-term capital gains (held for one year or less) are taxed at ordinary income rates, while long-term capital gains (held for more than one year) are taxed at lower rates.
• It is important to maintain detailed records of all crypto transactions, including dates, amounts, and market values, to accurately report gains and losses.
• Cryptocurrency exchanges and brokers are required to issue 1099 forms to their clients, which can help in determining the taxes owed. However, it is the taxpayer's responsibility to ensure accurate reporting, even if they do not receive these forms.
• Crypto taxes can be complicated, and it is recommended to consult a certified accountant or tax professional familiar with cryptocurrency tax regulations to ensure compliance with the law.

Frequently asked questions